Smead Value Fund's Top 2nd-Quarter Trades

New positions established in Discovery and Walgreens

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Graham Griffin
Jul 27, 2021

Summary

  • Fund purchases new holdings in Discovery and Walgreens.
  • Additions to Merck and Continental Resources Positions.
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The

Smead Value Fund (Trades, Portfolio) has revealed its top trades for the second quarter of this year. The quarter saw two new buys made into Discovery Inc. (DISCK, Financial) and Walgreens Boots Alliance Inc. (WBA, Financial), additions to the fund’s Merck & Co. Inc. (MRK, Financial) and Continental Resources Inc. (CLR, Financial) holdings and a reduction in its Discovery Inc. (DISCA, Financial) holding.

The fund seeks long-term capital appreciation through concentrated positions in large capitalization companies. The fund maintains approximately 25 to 30 companies in its portfolio that are managed by Bill Smead and co-portfolio managers Tony Scherrer and Cole Smead.

Portfolio overview

At the end of the quarter the fund’s portfolio contained 29 stocks, with the two new holdings in Discovery (

DISCK, Financial) and Walgreens (WBA, Financial). It was valued at $2.07 billion and has seen a turnover rate of 27%. Top holdings include Target Corp. (TGT, Financial), American Express Co. (AXP, Financial), Lennar corp. (LEN, Financial), Continental Resources and NVR Inc. (NVR, Financial).

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The top three represented sectors are consumer cyclical (24.23%), financial services (19.93%) and energy (12.76%).

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Discovery Series A

The fund cut back its Discovery (

DISCA, Financial) holding by 44.9% during the quarter with the sale of 1.03 million shares. The shares traded at an average price of $45.44 during the quarter. Overall, the sale had a -3.82% impact on the equity portfolio and GuruFocus estimates the total gain of the holding at 50.49%.

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Discovery is one of the largest global media providers with over 2 billion cumulative subscribers in over 220 countries. Its three traditional networks (Discovery, TLC and Animal Planet) each reach over 84 million U.S. households and more than 200 million international subscribers. The top two networks (HGTV and Food Network) acquired in the Scripps transaction are available in more than 87 million households in the U.S. The international segment consists of national and pan-regional networks over 294 unique distribution feeds in 50 languages.

On July 27, the stock was trading at $28.90 per share with a market cap of $14.28 billion. According to the GF Value Line, the company is trading at a modestly undervalued rating.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 9 out of 10. There are currently three severe warning signs issued for the company for assets growing faster than revenue, an Altman Z-Score indicating distress and an operating margin in decline. While the company’s operating margin of 21.77% is the worst it has been over the last decade, it still ranks better than 88.88% of industry competitors alongside strong net margins.

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Top gurus invested in Discovery (

DISCA, Financial) include Jim Simons (Trades, Portfolio)' Renaissance Technologies, the Smead Value Fund (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and David Tepper (Trades, Portfolio).

Discovery Series C

Smead and his co-portfolio managers also established a new position in the Series C shares of Discovery (

DISCK, Financial). They purchased 1.87 million shares during the quarter, which traded at an average price of $39.23, to create the holding. GuruFocus estimates the fund has lost 29.77% on the holding since it was established and the new buy had a 2.73% impact on the equity portfolio overall.

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Earlier this year, Discovery announced plans to merge its media and entertainment assets with AT&T Inc. (

T, Financial). The merger is expected to create a new leader in entertainment content that will ramp up its direct-to-consumer initiatives to offer more original content. The merger is expected to close some time in 2022 after shareholder and regulatory approvals.

As of July 27, the stock was trading at $27.49 per share with a market cap of $14.30 billion. The shares are trading at a modestly undervalued rating as seen on the GF Value Line chart.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 9 out of 10. The company has three severe warning signs issued for a declining operating margin, Altman Z-Score of 1.4 placing the company in the distress column and assets growing faster than revenue. The company’s cash-to-debt ratio of 0.13 ranks it worse than 84.54% of media industry competitors.

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Top gurus invested in Discovery (

DISCK, Financial) include Hotchkis & Wiley, the Smead Value Fund (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Gabelli.

Merck

The fund’s Merck (

MRK, Financial) holding saw a large addition of 80.77%. The 567,156 shares that were purchased traded at an average price of $73.31 during the quarter. Overall, the equity portfolio was impacted by 2.08% and GuruFocus estimates the fund has gained 14.60% in the last three years.

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Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiometabolic disease, cancer and infections. Within cancer, the firm's immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, close to half of the company's sales are generated in the United States.

The stock was trading at $77.72 per share with a market cap of $196.80 billion. It is trading at a fair value rating according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 5 out of 10. There are currently no severe warning signs issued for the company, but a medium warning sign has been generated for new long-term debt. The company’s above-average profitability rank has been supported by a rising return on invested capital that is easily able to support the weighted average cost of capital.

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Warren Buffett (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Grantham and the Parnassus Endeavor Fund (Trades, Portfolio) maintain the largest guru positions in Merck (MRK, Financial).

Continental Resources

The fund boosted its Continental Resources (

CLR, Financial) holding for the third quarter in a row. The holding grew by 45.43% during the quarter with the purchase of 1.14 million shares. GuruFocus estimates the fund has gained 72.69% on the holding and the shares have risen in price from the $28.22 per share paid on average during the quarter. Overall, the purchase had a 1.81% impact on the portfolio.

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Continental Resources is a U.S. oil and gas producer that targets the Bakken Shale deposit in North Dakota and the Scoop/Stack plays in Oklahoma. At the end of 2020, the company reported net proven reserves of 1.1 billion barrels of oil equivalent. Net production averaged 300 thousand barrels of oil equivalent per day in 2019, at a ratio of 54% oil and 46% natural gas and NGLs.

On July 27, the stock was trading at $34.27 per share with a market cap of $12.60 billion. According to the GF Value Line, the shares are trading at a modestly overvalued rating.

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GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 7 out of 10. There are currently five severe warning signs issued, including low interest coverage and poor financial strength. Over the last several years, the company’s revenue has fallen off at a drastic rate and net income fell into losses in 2020.

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The

Smead Value Fund (Trades, Portfolio) is the top guru shareholder with Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Michael Price (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) following well behind.

Walgreens

The fund established another new holding in Walgreen (

WBA, Financial) for the first time after selling out of the holding last year. The 573,172 shares purchased to bring the company back into the portfolio were purchased at an average price of $53.36 per share during the quarter. GuruFocus estimates the fund has lost 22.66% on the holding and the purchase had a 1.46% impact on the portfolio overall.

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Walgreens Boots Alliance operates over 21,000 locations in 50 states and 11 countries. The core defensive positioning is primarily around the pharmacies that are placed in high traffic locations. Currently, the company has the largest retail pharmacy market share (around 20%, excluding mail), which provides significant cost advantages and scale. Walgreens has established strategic partnerships to offer incremental services to increase average revenue per customer and has equity stakes in AmerisourceBergen (26%) and Sinopharm Holding Guoda Drugstores (40%).

As of July 27, the stock was trading at $46.83 per share with a market cap of $40.50 billion. The shares are trading at a modestly undervalued rating according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 10 out of 10. There are currently two severe warning signs issued for declining gross and operating margins. While the company has seen decreasing cash flows since 2018, free cash flow is able to easily support dividend payouts.

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Top gurus invested in Walgreens (

WBA, Financial) include Pioneer Investments (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), John Rogers (Trades, Portfolio), Larry Robbins (Trades, Portfolio) and Simons' firm.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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