Renowned guru Frank Sands (Trades, Portfolio), the CEO and chief investment officer of Sands Capital Management, disclosed a reduction in his firm’s Grocery Outlet Holding Corp. (GO, Financial) position last week.
The Arlington, Virginia-based value investment firm, which was founded by Sands’ father in 1992, approaches stock picking with the belief that, over time, share prices reflect the underlying company’s earnings growth. Using a fundamental, business-focused process, the investment team looks for a concentrated number of high-quality, wealth-creating growth opportunities to hold for the long term.
According to GuruFocus Real-Time Picks, a Premium feature, the firm curbed its stake in the Emeryville, California-based discount supermarket chain by 54.27%, selling 4.6 million shares. The stock traded for an average price of $33.12 per share on the day of the transaction.
Sands Capital still holds 3.8 million shares, giving it 0.25% space in the equity portfolio. GuruFocus estimates the firm has lost 6.1% on the investment since establishing it in the second quarter of 2020.
Grocery Outlet, which operates supermarkets offering discounted, overstocked and closeout products from name-brand and private label suppliers in California, Oregon, Washington, Idaho, Nevada and Pennsylvania, has a $3.07 billion market cap; its shares were trading around $31.87 on Monday with a price-earnings ratio of 28.15, a price-book ratio of 3.23 and a price-sales ratio of 1.01.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overvalued.
On May 11, Grocery Outlet reported its first-quarter results. It posted earnings of 19 cents per share, while net income increased 49.4% from the year-ago quarter to $18.9 million. Net sales, however, decreased 1% from last year to $752.5 million.
In a statement, CEO Eric Lindberg expressed his pleasure with Grocery Outlet’s performance.
“As our markets begin to reopen, we believe that we are well positioned for long-term growth due to our deep value orientation, strong customer and supplier relationships, and significant whitespace opportunity,” he said. “We remain committed to our long-term algorithm of expanding our store base 10% each year while continually reinvesting in our business. We will continue to execute on our strategic initiatives that support consistent long-term growth and drive stockholder value."
The company is scheduled to report its second-quarter results after the closing bell on Aug. 10.
Grocery Outlet’s financial strength and profitability were both rated 4 out of 10 by GuruFocus. Despite having adequate interest coverage, the Altman Z-Score of 2.77 indicates the company is under some pressure since the debt ratios are underperforming compared to the rest of the industry.
The company is also being supported by margins and returns on equity, assets and capital that outperform at least half of its competitors. Grocery Outlet has a high Piotroski F-Score of 7, indicating operations are healthy.
In addition to moderate insider selling in recent months, there has also been some guru selling. While Sands’ firm remains Grocery Outlet’s largest guru shareholder with 4.04% of outstanding shares, Pioneer Investments (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance both slightly reduced their holdings during the first quarter of the year. Jerome Dodson (Trades, Portfolio)’s firm also owns the stock, but has not made any changes to its position since 2020.
Portfolio composition and performance
Around half of Sands’ $51.75 billion equity portfolio, which was composed of 75 stocks as of the end of the first quarter, is invested in the communication services and technology sectors, followed by smaller representations of the consumer cyclical and health care spaces.
Other stocks the guru’s firm holds in the consumer defensive sector are Dollar General Corp. (DG, Financial), New Oriental Education & Technology Group Inc. (EDU, Financial) and Chegg Inc. (CHGG, Financial).
GuruFocus data shows the firm’s Select Growth Fund returned 71.4% in 2020, outperforming the S&P 500’s 18.4% return.
