Muhlenkamp & Co. Inc., the investment firm founded by Ronald Muhlenkamp (Trades, Portfolio), released its portfolio for the second quarter earlier this month.
While he is still acting as the firm’s chairman, Muhlenkamp, who was a recent guest on GuruFocus’ Value Investing Live, passed most operational responsibilities on to his sons in 2019. With the goal of maximizing returns through capital appreciation, as well as income from dividends and interest, his Wexford, Pennsylvania-based firm typically invests in highly profitable companies trading at a discount. When picking stocks, it seeks companies with strong balance sheets and high returns on equity. The firm believes that over time, stock prices reflect the companies’ underlying value and that the long-term business of investing offers a higher chance of profitability and reliability.
In his quarterly letter to shareholders, Muhlenkamp noted the main attribute of the three months ended June 30 was “noise.”
“The economic noise introduced by Covid-19 and the responses to it by individuals, businesses, and governments made it extremely difficult to determine what the underlying trends were,” he wrote. “We expect this noisy environment to persist for at least another quarter or two assuming that Covid countermeasures diminish over time. If there is a resurgence of the virus and additional countermeasures are taken by governments the period of noise will be extended.”
Based on these considerations, the firm disclosed it entered one new position, sold out of one stock and boosted a slew of other existing holdings during the quarter. The most notable trades included the removal of Equity Commonwealth (EQC, Financial) from the portfolio, a new holding in Invitae Corp. (NVTA, Financial) and additions to the Cameco Corp. (CCJ, Financial), MasTec Inc. (MTZ, Financial) and Bristol-Myers Squibb Co. (BMY, Financial) positions.
Equity Commonwealth
After establishing a position in Equity Commonwealth (EQC, Financial) during the first quarter, the firm sold all 38,348 shares, impacting the equity portfolio by -0.37%. The stock traded for an average price of $27.82 per share during the quarter.
GuruFocus estimates the firm lost 1.59% on the short-lived investment.
The Chicago-based real estate investment trust, which is pursuing a merger with Monmouth Real Estate Investment Corp. (MNR, Financial), has a $3.16 billion market cap; its shares were trading around $25.94 on Tuesday with a price-book ratio of 1.02 and a price-sales ratio of 52.47.
The GF Value Line suggests the stock is significantly overvalued currently based on historical ratios, past performance and future earnings projections.
GuruFocus rated Equity Commonwealth’s financial strength 8 out of 10. In addition to having no long-term debt currently, the robust Altman Z-Score of 78.77 indicates the company is in good standing.
The company’s profitability scored a 5 out of 10 rating on the back of negative margins and returns on equity, assets and capital that outperform a majority of competitors that underperform a majority of competitors. Equity Commonwealth also has a moderate Piotroski F-Score of 5, indicating operations are typical for a stable company, but the predictability rank of one out of five stars is on watch as a result of revenue per share declining over the past five years. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Equity Commonwealth, John Rogers (Trades, Portfolio) has the largest stake with 1.13% of outstanding shares. Other top guru shareholders include Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Chuck Royce (Trades, Portfolio), Steven Scruggs (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Pioneer Investments and Murray Stahl (Trades, Portfolio).
Invitae
Muhlenkamp’s firm picked up 6,390 shares of Invitae (NVTA, Financial), dedicating 0.08% of the equity portfolio to the holding. Shares traded for an average price of $32.65 each during the quarter.
The company headquartered in San Francisco, which provides genetic testing services for medical purposes, has a market cap of $5.98 billion; its shares were trading around $27.74 on Tuesday with a price-book ratio of 2.1 and a price-sales ratio of 13.4.
According to the GF Value line, the stock is significantly overvalued.
Invitae’s financial strength was rated 4 out of 10 by GuruFocus. The Altman Z-Score of 1.33 warns the company could be at risk of bankruptcy if it does not improve its liquidity. Assets are also building up at a faster rate than revenue is growing, indicating it may be becoming less efficient.
The company’s profitability fared even worse, scoring a 2 out of 10 rating. Although the operating margin is expanding, the returns are negative and underperform a majority of industry peers. Invitae also has a low Piotroski F-Score of 2, meaning business conditions are in poor shape, while revenue per share has been declining for the past 12 months.
With a 9.85% stake, Catherine Wood (Trades, Portfolio) is Invitae’s largest guru shareholder. Mario Gabelli (Trades, Portfolio) also has a position in the stock.
Cameco
With an impact of 0.03% on the equity portfolio, the firm upped its Cameco (CCJ, Financial) position by 1.01%, buying 3,810 shares. During the quarter, the stock traded for an average per-share price of $18.83.
The firm now holds 379,585 shares total, which represent 2.67% of the equity portfolio. GuruFocus data shows it has gained around 27.72% on the investment since establishing it in the fourth quarter of 2016.
The Canadian company, which is the world’s largest publicly traded producer of uranium, has a $6.7 billion market cap; its shares were trading around $17.06 on Tuesday with a price-book ratio of 1.75 and a price-sales ratio of 5.44.
Based on the GF Value line, the stock appears to be significantly overvalued currently.
Cameco’s financial strength and profitability were both rated 5 out of 10 by GuruFocus. In addition to steady debt-related ratios, the company has a high Altman Z-Score of 3.07 that indicates it is in good standing.
The company is being weighed down by negative margins, but returns beat slightly over half of its competitors. Cameco also has a low Piotroski F-Score of 3. The one-star predictability rank is on watch as a result of revenue per share declining over the past five years.
Charles Brandes (Trades, Portfolio) is Cameco’s largest guru shareholder with a 0.89% stake. Louis Moore Bacon (Trades, Portfolio) and Pioneer Investments also have significant holdings.
MasTec
The guru’s firm upped its position in MasTec (MTZ, Financial) by 0.42%, buying 541 shares. The transaction had an impact of 0.02% on the equity portfolio. During the quarter, the stock traded for an average price of $108.26 per share.
It now holds 129,175 shares total, accounting for 5.03% of the equity portfolio and is the fourth-largest holding. Muhlenkamp’s firm has gained an estimated 125.14% on the investment according to GuruFocus.
The Coral Gables, Florida-based infrastructure engineering and construction company has a market cap of $6.84 billion; its shares were trading around $92.28 on Tuesday with a price-earnings ratio of 18.27, a price-book ratio of 3.17 and a price-sales ratio of 0.96.
The GF Value Line suggests the stock is significantly overvalued currently.
GuruFocus rated MasTec’s financial strength 5 out of 10. While the company has adequate interest coverage, the Altman Z-Score of 3.21 indicates it is in good standing. The return on invested capital also eclipses the weighted average cost of capital, indicating value is being created as the company grows.
The company’s profitability scored a 7 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of industry peers and a high Piotroski F-Score of 7, which means business conditions are healthy. Driven by steady earnings and revenue growth, MasTec also has a two-star predictability rank. GuruFocus says companies with this rank return an average of 6% annually.
Of the gurus invested in MasTec, Richard Pzena (Trades, Portfolio) has the largest holding with 0.89% of outstanding shares. Simons’ firm, Steven Scruggs (Trades, Portfolio), Bacon, the FPA Capital Fund (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Royce, Joel Greenblatt (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) also have positions in the stock.
Bristol-Myers Squibb
Impacting the equity portfolio by 0.01%, Muhlenkamp’s firm increased its Bristol-Myers Squibb (BMY, Financial) holding by 0.16%, buying 204 shares. During the quarter, shares traded for an average price of $65.15 each.
The firm now holds 125,623 shares total, making up 3.08% of the equity portfolio. GuruFocus data shows it has gained around 10.72% on the investment since establishing it in the fourth quarter of 2019.
The pharmaceutical giant, which is headquartered in New York, has a $152.55 billion market cap; its shares were trading around $68.70 on Tuesday with a price-book ratio of 4.15 and a price-sales ratio of 3.5.
According to the GF Value Line, the stock is fairly valued currently.
Bristol-Myers Squibb’s financial strength was rated 4 out of 10 by GuruFocus. As a result of issuing approximately $15.9 billion in new long-term debt over the past three years, the company has weak interest coverage. In addition, the Altman Z-Score of 1.95 indicates it is under some pressure since assets are building up at a faster rate than revenue is growing.
The company’s profitability scored a 7 out of 10 rating despite having a declining operating margin. Bristol-Myers Squibb also has negative returns that underperform a majority of competitors and a moderate Piotroski F-Score of 6. The one-star predictability rank is on watch as a result of recording losses in operating income over the past three years.
Dodge &Cox has the largest stake in Bristol-Myers with around 1.28% of its outstanding shares. Other top guru shareholders are the Vanguard Health Care Fund (Trades, Portfolio), Warren Buffett (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Simons’ firm, Pioneer Investments, Hotchkis & Wiley, Wood and Pzena.
Additional trades and portfolio performance
Other positions Muhlenkamp’s firm added to during the quarter were Berkshire Hathaway Inc. (BRK.B, Financial), Microsoft Corp. (MSFT, Financial), CVS Health Corp. (CVS, Financial), Schlumberger Ltd. (SLB, Financial), McKesson Corp. (MCK, Financial) and UnitedHealth Group Inc. (UNH, Financial)
Over half of the firm’s $273 million equity portfolio, which is composed of 33 stocks, is invested in the industrials, technology and health care sectors.
According to the firm’s website, the Muhlenkamp Fund returned 11.86% in 2020, slightly underperforming the S&P 500’s 18.4% return.
