Auxier Asset Management leader Jeff Auxier (Trades, Portfolio) released his second-quarter portfolio last week.
The guru’s Oregon-based firm seeks to invest in “compelling, undervalued” companies that have, among other attributes, strong or improving fundamentals, consistent operating results, a significant competitive advantage, understandable products and a demonstrated ability to earn a high return on capital.
In his quarterly commentary, Auxier noted the firm has continued to “meet with numerous management teams” and seen “powerful” earnings from companies that have scale and have been “aggressively digitizing.”
“So far, we are seeing most businesses raise prices and consumers willing to pay up,” he wrote. “This has contributed to a tremendous broad-based earnings improvement for our portfolio companies.”
Keeping these considerations in mind, Auxier established three new positions during the three-month period ended June 30, eliminated a stake and added to or trimmed a slew of other existing holdings. Among the most notable trades was a new investment in Organon & Co. (OGN, Financial), a boost to the Alibaba Group Holding Ltd. (BABA, Financial) position and reductions to the PepsiCo Inc. (PEP, Financial), Mastercard Inc. (MA, Financial) and Johnson & Johnson (JNJ, Financial) holdings.
Organon
Auxier disclosed a 21,053-share position in Organon (OGN, Financial), allocating it to 0.11% of the equity portfolio. The stock traded for an average price of $33 per share during the quarter.
The New Jersey-based pharmaceutical company, which was spun off of Merck (MRK, Financial) in June, has an $8.36 billion market cap; its shares were trading around $32.99 on Monday with a price-earnings ratio of 10.13 and a price-sales ratio of 2.7.
While the parent company received a $9 billion distribution in connection with the spinoff, Organon did not issue fractional shares of its common stock. Instead, shareholders of Merck common shares received cash in lieu of any fractional shares of Organon common stock that they would have otherwise been entitled to.
Additionally, the parent company declared a special dividend distribution of one-tenth of a share of Organon common stock for every Merck common share outstanding as of the close of business on May 17. As such, for every 10 shares of Merck held by an investor, they received one share of Organon.
Since being spun off, shares of Organon have dipped 0.51%.
Organon’s financial strength and profitability were both rated 4 out of 10 by GuruFocus. Despite having a comfortable level of interest coverage, the Altman Z-Score of 1.24 warns the company could be at risk of going bankrupt if it does not improve its liquidity. The return on invested capital also surpasses the weighted average cost of capital, indicating value is being created as the company grows.
The company is also being supported by margins and returns on equity, assets and capital that outperform a majority of competitors. Organon has recorded a decline in revenue per share over the past 12 months, however.
Of the gurus invested in Organon, Warren Buffett (Trades, Portfolio) has the largest stake with 0.61% of outstanding shares. Other notable guru shareholders include Ken Fisher (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Alibaba
The guru boosted the Alibaba (BABA, Financial) investment by 82.35%, buying 6,695 shares. The transaction had an impact of 0.25% on the equity portfolio. Shares traded for an average price of $222.15 each during the quarter.
Auxier now holds 14,825 shares total, which represent 0.56% of the equity portfolio. GuruFocus estimates he has lost 35% on the investment so far.
The Chinese e-commerce company has a market cap of $418.14 billion; its shares were trading around $154.24 on Monday with a price-earnings ratio of 18.81, a price-book ratio of 2.76 and a price-sales ratio of 3.62.
The GF Value Line suggests the stock is significantly undervalued currently based on historical ratios, past performance and future earnings projections.
GuruFocus rated Alibaba’s financial strength 7 out of 10. The company has a good cash-debt ratio, a comfortable level of interest coverage and a robust Altman Z-Score of 4.15, indicating it is in good standing. The ROIC also eclipses the WACC, indicating good value creation.
The company’s profitability fared a bit better with an 8 out of 10 rating. Although the operating margin is in decline, Alibaba has strong returns that outperform a majority of industry peers as well as a moderate Piotroski F-Score of 5, meaning conditions are typical for a stable company. Despite recording consistent earnings and revenue growth, the predictability rank of three out of five stars is on watch. According to GuruFocus, companies with this rank return an average of 8.2% annually over a 10-year period.
Baillie Gifford (Trades, Portfolio) is Alibaba’s largest guru shareholder with a 0.95% stake. Other top guru investors include PRIMECAP Management (Trades, Portfolio), Fisher, Dodge & Cox, Frank Sands (Trades, Portfolio), Pioneer Investments, Chase Coleman (Trades, Portfolio), Chris Davis (Trades, Portfolio), Al Gore (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Ron Baron (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Tweedy Browne (Trades, Portfolio), Tom Russo (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Grantham.
PepsiCo
With an impact of -0.36% on the equity portfolio, the investor pared his holding of PepsiCo by 14.38%, selling 14,835 shares. The stock traded for an average per-share price of $145.60 during the quarter.
Auxier now holds 88,318 shares total, accounting for 2.17% of the equity portfolio and is his 10th-largeset holding. GuruFocus data shows he has gained an estimated 104.76% on the investment.
The snacks and beverage giant, which is headquartered in Purchase, New York, has a $218.64 billion market cap; its shares were trading around $158.19 on Monday with a price-earnings ratio of 61.28, a price-book ratio of 2.76 and a price-sales ratio of 4.85.
According to the GF Value Line, the stock is fairly valued currently.
PepsiCo’s financial strength was rated 4 out of 10 by GuruFocus. In addition to adequate interest coverage, the company is supported by a high Altman Z-Score of 3.88, indicating it is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC overshadows the WACC, implying that the company is able to create value while growing.
The company’s profitability scored an 8 out of 10 rating. Even though the operating margin is declining, the returns are outperforming a majority of competitors. PepsiCo also has a moderate Piotroski F-Score of 6, and consistent earnings and revenue growth contributed to a three-star predictability rank.
With a 0.47% stake, Pioneer is the company’s largest guru shareholder. Yacktman Asset Management (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio) and Dalio also have significant positions in PepsiCo.
Mastercard
Curbing the position in Mastercard (MA, Financial) by 5.51%, the guru sold 2,870 shares. The transaction had an impact of -0.18% on the equity portfolio. During the quarter, the stock traded for an average price of $371.26 per share.
Auxier now holds 49,235 shares total, giving it 2.98% space in the equity portfolio. It is his fifth-largest position. GuruFocus estimates he has gained 979.39% on the long-held investment.
The Purchase, New York-based financial services company, which provides global payment technology solutions and services, has a market cap of $357.02 billion; its shares were trading around $361.80 on Monday with a price-earnings ratio of 50.26, a price-book ratio of 55.49 and a price-sales ratio of 21.72.
Based on the GF Value Line, the stock appears to be modestly overvalued currently.
In his letter for the quarter, Auxier wrote that even thought the Delta variant of the Covid-19 virus is “spreading and hampering travel,” he does not anticipate Mastercard’s growth slowing down if lockdowns are not reinstated.
GuruFocus rated Mastercard’s financial strength 5 out of 10, driven by a comfortable level of interest coverage. Even though the Altman Z-Score of 10.56 is healthy, assets are building up at a faster rate than revenue is growing. The ROIC also tops the WACC, suggesting good value creation is occurring.
The company’s profitability fared even better, scoring a 9 out of 10 rating on the back of an expanding operating margin, returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 5. Although Mastercard’s revenue per share growth has slowed down recently, it still has a five-star predictability rank. GuruFocus says companies with this rank return an average of 12.1% annually.
Of the gurus invested in Mastercard, Chuck Akre (Trades, Portfolio)’s firm has the largest stake with 0.59% of outstanding shares. Buffett, Fisher, Baillie Gifford (Trades, Portfolio), Pioneer, Russo, Spiros Segalas (Trades, Portfolio) and Steve Mandel (Trades, Portfolio) also have significant stakes in the company.
Johnson & Johnson
Impacting the equity portfolio by -0.11%, Auxier trimmed his Johnson & Johnson (JNJ, Financial) holding by 4.43%, selling 3,975 shares. Shares traded for an average price of $165.55 each during the quarter.
The guru now holds 85,783 shares total, accounting for 2.34% of the equity portfolio. It is his ninth-largest position. GuruFocus data shows he has gained an estimated 141% on the investment.
The health care conglomerate, which is headquartered in New Brunswick, New Jersey, has a $468.82 billion market cap; its shares were trading around $178.09 on Monday with a price-earnings ratio of 26.77, a price-book ratio of 6.74and a price-sales ratio of 5.32.
The GF Value Line shows the stock is currently modestly overvalued.
Auxier wrote in his quarterly letter that Johnson & Johnson is “seeing a boost to sales and earnings” as lockdown restrictions are lifted and “previously deferred medical procedures” are finally being completed.
Johnson & Johnson’s financial strength was rated 6 out of 10 by GuruFocus, driven by comfortable interest coverage and a high Altman Z-Score of 4.59. Despite the fact assets are building up at a faster rate than revenue is growing, the ROIC exceeds the WACC, suggesting good value creation.
Despite having a declining operating margin, the company’s profitability scored an 8 out of 10 rating on the back of strong returns that outperform a majority of competitors. Johnson & Johnson also has a high Piotroski F-Score of 7, indicating business conditions are healthy, and consistent earnings and revenue growth contributed to a three-star predictability rank.
Pioneer tops the list of notable guru shareholders with a 0.19% stake. Dalio, Grantham, Yacktman Asset Management (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Tweedy Browne (Trades, Portfolio), Mairs and Power (Trades, Portfolio) and the T Rowe Price Equity Income Fund (Trades, Portfolio) also have significant positions in Johnson & Johnson.
Additional trades and portfolio performance
During the quarter, Auxier also established new holdings in Charter Communications Inc. (CHTR, Financial) and Global Medical REIT Inc. (GMRE, Financial). He eliminated his position in CytoDyn Inc. (CYDY, Financial) as well.
Nearly half of the guru’s $603 million equity portfolio, which is composed of 164 stocks, is invested in the health care and financial services sectors, followed by a 17.21% holding in the consumer defensive space.
GuruFocus data shows the Auxier Focus Fund returned 6.03% in 2020, underperforming the S&P 500’s 18.4% return.
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