When searching for value investment opportunities, Oakmark Fund manager Bill Nygren (Trades, Portfolio) takes the approach of a business owner, considering each position as owning a piece of the business as opposed to just a stock certificate.
To achieve long-term capital appreciation, the renowned guru, who also manages the Chicago-based firm’s Select and Global Select funds, usually invests in mid- and large-cap companies. When picking stocks, he looks for growing companies that have shareholder-oriented management teams. According to the fund’s fact sheet, he prefers to take a position when the stock is trading at a substantial discount to his estimate of intrinsic value, then waits for the gap between the two to close before selling.
As of the end of the first quarter, the industrials sector had the fifth-largest representation in Nygren’s $14.91 billion equity portfolio with a weight of 8.09%.
According to GuruFocus portfolio data, Nygren’s five industrial holdings as of the end of the three months ended March 31 were Caterpillar Inc. (CAT, Financial), General Electric Co. (GE, Financial), Automatic Data Processing Inc. (ADP, Financial), Cummins Inc. (CMI, Financial) and General Dynamics Corp. (GD, Financial)
Caterpillar
In the first quarter, the guru trimmed his stake in Caterpillar (CAT, Financial) by 3.4% to 1.42 million shares. The position accounts for 2.21% of the equity portfolio. GuruFocus estimates Nygren has gained 71.7% on the investment since establishing it in the first quarter of 2015.
The Deerfield, Illinois-based company, which manufactures construction machinery and equipment, has a $119.2 billion market cap; its shares were trading around $208.71 on Thursday with a price-earnings ratio of 34.75, a price-book ratio of 7.18 and a price-sales ratio of 2.77.
The GF Value Line suggests the stock is significantly overvalued currently based on historical ratios, past performance and future earnings projections.
GuruFocus rated Caterpillar’s financial strength 5 out of 10. Although the company has issued approximately $3.4 billion in new long-term debt over the past three years, it is still manageable due to a sufficient level of interest coverage. The Altman Z-Score of 2.73, however, indicates the company is under some pressure even though the return on invested capital surpasses the weighted average cost of capital, indicating value is being created as it grows.
The company’s profitability scored a 6 out of 10 rating, driven by an expanding operating margin and strong returns on equity, assets and capital that outperform a majority of competitors. Caterpillar also has a moderate Piotroski F-Score of 4, which indicates business conditions are stable, but the profitability rank of one out of five stars is on watch as a result of revenue per share declining over the past 12 months. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Caterpillar, Bill Gates (Trades, Portfolio)’ foundation trust has the largest stake with 1.85% of outstanding shares. Other top guru shareholders include Ken Fisher (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio).
General Electric
Nygren curbed his General Electric (GE, Financial) stake by 7.69% during the quarter to 24 million shares, which represent 2.11% of the equity portfolio. According to GuruFocus, he has lost an estimated 25.04% on the investment since the fourth quarter of 2014.
The industrial conglomerate headquartered in Boston, which operates in a wide number of industries, including aviation, health care, power and renewable energy, has a market cap of $117.85 billion; its shares were trading around $13.12 on Thursday with a price-book ratio of 3.51 and a price-sales ratio of 1.55.
According to the GF Value Line, the stock is significantly overvalued currently.
GE’s financial strength was rated 4 out of 10 by GuruFocus on the back of a low Altman Z-Score of 1.44 that warns it could be in danger of bankruptcy if it does not improve its liquidity. The ROIC has also fallen below the WACC, indicating issues with creating value.
The company’s profitability did not fare much better, scoring a 5 out of 10 rating on the back of margins and returns that underperform a majority of industry peers. GE also has a low Piotroski F-Score of 3, indicating operations are in poor shape, and a one-star predictability rank that is on watch as a result of revenue per share declining over the past five years.
With a 1.1% stake, Hotchkis & Wiley is GE’s largest guru shareholder. Richard Pzena (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), Nelson Peltz (Trades, Portfolio), Mason Hawkins (Trades, Portfolio), Pioneer, Stanley Druckenmiller (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Prem Watsa (Trades, Portfolio) also have significant stakes.
Automatic Data Processing
The investor left his stake in Automatic Data Processing (ADP, Financial) unchanged at 1.15 million shares during the first quarter, which account for 1.45% of the equity portfolio. GuruFocus data shows Nygren has gained an estimated 118.22% on the investment since the third quarter of 2009.
Commonly known as ADP, the Roseland, New Jersey-based company, which provides human resources management software, has an $83.86 billion market cap; its shares were trading around on $198.35 on Thursday with a price-earnings ratio of 34.18, a price-book ratio of 14.81 and a price-sales ratio of 5.78.
Based on the GF Value Line, the stock appears to be modestly overvalued currently.
GuruFocus rated ADP’s financial strength 5 out of 10, boosted by comfortable interest coverage. The Altman Z-Score of 2.04, however, indicates the company is under some pressure.
The company’s profitability fared better with an 8 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 7, which suggests business conditions are healthy. ADP also has a 2.5-star predictability rank, which is on watch as a result of a slowdown in revenue per share growth over the past year. GuruFocus data shows companies with this rank return an average of 7.3% annually.
Pioneer is the ADP’s largest guru shareholder with 0.48% of its outstanding shares. The MS Global Franchise Fund, Robert Olstein (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Fisher, Dodge & Cox and Mario Gabelli (Trades, Portfolio) also have positions in the stock.
Cummins
Nygren reduced his position in Cummins (CMI, Financial) by 5.47% in the most recent quarter. Representing 1.35% of the equity portfolio, he now owns 777,000 shares. GuruFocus says he has gained an estimated 52.13% on the investment since the third quarter of 2015.
Headquartered in Columbus, Indiana, the company, which manufactures diesel engines, filtration systems and power generationg products, has a market cap of $35.99 billion; its shares were trading around $235.43 on Thursday with a price-earnings ratio of 19.46, a price-book ratio of 4.44 and a price-sales ratio of 1.75.
The GF Value Line suggests the stock is significantly overvalued currently.
Cummins’ financial strength was rated 6 out of 10 by GuruFocus. Although the company has issued approximately $1.5 billion in new long-term debt over the past three years, it is at a manageable level as a result of adequate interest coverage. The robust Altman Z-Score of 4.08 also indicates it is in good standing despite assets building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, indicating good value creation is occurring.
The company’s profitability scored an 8 out of 10 rating. While the operating margin is in decline, it, along with the company’s returns, is outperforming a majority of industry peers. Cummins also has a moderate Piotroski F-Score of 5, but the four-star predictability rank is on watch due to revenue per share declining over the past year. GuruFocus says companies with this rank return an average of 9.8% annually.
Of the gurus invested in Cummins, Hotchkis & Wiley has the largest stake with 1.39% of outstanding shares. First Eagle Investment (Trades, Portfolio)s and Pioneer also have significant holdings.
General Dynamics
The guru left his General Dynamics (GD, Financial) holding unchanged at 800,000 shares. The stock represents 0.97% of the equity portfolio. GuruFocus data shows Nygren has gained an estimated 32.72% on the investment since the second quarter of 2020.
The Reston, Virginia-based aerospace and defense company, which builds Gulfstream business jets as well as manufactures combat vehicles, submarines and mission control systems, has a $52.86 billion market cap; its shares were trading around $187.04 on Thursday with a price-earnings ratio of 16.92, a price-book ratio of 3.44 and a price-sales ratio of 1.39.
According to the GF Value Line, the stock is fairly valued currently.
GuruFocus rated General Dynamics’ financial strength 5 out of 10. In addition to adequate interest coverage, the company is supported by a high Altman Z-Score of 3.06. Assets are building up at a faster rate than revenue is growing, however, suggesting the company may be becoming less efficient.
The company’s profitability scored an 8 out of 10 rating. Although the operating margin is in decline, General Dynamics’ returns are outperforming a majority of competitors. It also has a moderate Piotroski F-Score of 6, but the three-star predictability rank is on watch as a result of revenue per share growth slowing down over the past year. Companies with this rank return an average of 8.2% annually according to GuruFocus data.
Barrow, Hanley, Mewhinney & Strauss is the company’s largest guru shareholder with a 1.06% stake. PRIMECAP also has a large position in General Dynamics.
