In the second quarter ended June 30, U.S. stock markets continued their bull run as government stimulus, low interest rates and support for ever-increasing levels of corporate debt helped most companies report higher earnings numbers. Many investors are brushing off concerns about higher inflation, supply chain bottlenecks and lower-than-expected employment numbers; in fact, given the low yields available in the rest of the market, stocks have increased in popularity as protection against inflation.
The major indexes once again reached new unprecedented highs. The S&P 500 surpassed 4,200 for the first time in history during this period, the Nasdaq topped 14,100 and the Dow Jones Industrial Average beat the 34,700 mark.
The U.S. stock market continues to be valued far higher than what the country’s collective businesses are currently worth. The Buffett Indicator, which is the ratio of total market cap to gross domestic product, stands at 201.4% as of Aug. 26, indicating that the U.S. stock market is significantly overvalued. This metric is named after Warren Buffett (Trades, Portfolio), who famously called it “probably the best single measure of where valuations stand at any given moment.”
As the Federal Reserve has repeatedly proven its commitment to keeping interest rates low and making it easier for highly indebted companies to borrow even more money, GuruFocus now includes in this chart the total assets of the Federal Reserve. With Fed support factored in, the valuation ratio of the Buffett Indicator stands at 150.1%, which is still overvalued but not by quite as much. It should be noted that Fed support disproportionately benefits the nation’s largest companies.
Despite the general overvaluation, the value investing gurus have still found plenty of names that they expect to profit on. According to GuruFocus’ Hot Picks, a feature which allows investors to screen for the stocks that had the highest number of guru buys or sells based on the most recent regulatory filings, the five most popular stocks among gurus during the second quarter of 2021 (as determined by net buys) were Alibaba Group Holding Ltd. (BABA, Financial), Cognizant Technology Solutions Corp. (CTSH, Financial), Vishay Intertechnology Inc. (VSH, Financial), The Mosaic Co. (MOS, Financial) and IHS Markit Ltd. (INFO, Financial).
Alibaba Group Holding
Alibaba (BABA, Financial) is a Chinese multinational conglomerate with holdings in e-commerce, retail, internet and technology assets, among many others. By volume, Alibaba is the largest e-commerce company in the world, with millions of merchants and hundreds of millions of users.
During the quarter, 27 gurus bought shares of Alibaba while only eight sold the stock, resulting in 19 net buys. As of the quarter’s end, 39 gurus have a stake in the company. As we can see in the chart below, gurus have mainly been bullish on Alibaba for the past three quarters:
The most notable guru shareholder of the stock is Baillie Gifford (Trades, Portfolio) with 0.95% of shares outstanding, followed by Primecap Management with 0.58% and Ken Fisher (Trades, Portfolio) with 0.52%. Mohnish Pabrai (Trades, Portfolio) and Steven Romick (Trades, Portfolio) were among those increasing their Alibaba holdings in the second quarter, while Catherine Wood (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio) reduced their stakes.
During the quarter, shares of Alibaba traded for an average price of $222.15. As of Aug. 27, the stock trades around $159.33 with a 52-week range of $152.80 to $319.32. The GuruFocus Value chart rates the stock as significantly undervalued.
Alibaba has had a tough year. The company drew regulatory scrutiny in October last year after its billionaire founder Jack Ma made comments that were critical of China’s regulatory system. At that time, Alibaba was about to spin off its fintech business Ant Group, which would have been the largest initial public offering in history if it had been completed successfully. Shortly after, Chinese regulators seem to have moved big tech regulations to the top of their agenda.
Since then, regulators have cracked down on Chinese tech and education stocks. Chinese companies will still be allowed to go public in the U.S., but now they will have to meet the listing requirements that they were previously allowed to dodge. While new regulations for education stocks have been stricter, tech stocks do not appear to face any long-term impediments to the growth of their business, at least at the moment. As long as Alibaba’s revenue-generating potential isn’t affected, the stock’s current price-earnings ratio of 19.41 and three-year revenue per share growth rate of 38.2% make it look cheap.
Cognizant Technology Solutions
Cognizant Technology Solutions (CTSH, Financial) is a New Jersey-based IT company that provides digital, technology, consulting and IT services to businesses. Specifically, it focuses on helping clients transform their businesses’ operating and technology models for the digital era.
During the quarter, 14 gurus bought shares of Cognizant while only two sold the stock, resulting in 12 net buys. As of the quarter’s end, 18 gurus owned shares of the stock. The chart below shows that gurus have mainly been bullish on the stock for the past two quarters:
The top guru shareholder of the stock is Dodge & Cox with 5.56% of shares outstanding, followed by Richard Pzena (Trades, Portfolio) with 2.29% and Barrow, Hanley, Mewhinney & Strauss with 1.29%. Jeremy Grantham (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies were among the gurus buying shares of Cognizant in the second quarter, while Al Gore (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) sold shares.
During the quarter, shares of Cognizant traded for an average price of $74.54. As of Aug. 27, the stock trades around $77.46 with a 52-week range of $65.04 to $82.73. The GF Value chart rates the stock as fairly valued.
Cognizant operates in four groups: financial services, health care, products and resources and communications, media and technology. Financial services, which accounts for 32.8% of revenue, posted a year-over-year sales increase of 7.6% in the second quarter of 2021. The health care segment’s growth was higher at 14.5%. The company’s best growth prospects come from its products and resources category, which grew 21.7%, and its communications, media and technology segment, which saw revenue rise 21.2%. Granted, these are all easy comparisons versus the second quarter of 2020 due to the pandemic, but Cognizant has now grown to above pre-pandemic levels.
The services that Cognizant provides to clients are expected to see a growing customer base in the coming years as more and more businesses focus on transforming themselves with modern technology. More and more businesses are finding that technology can streamline their processes, reduce expenses and allow them to provide products and services to more customers than ever before. Additionally, if a business puts off modernizing its operations, it allows an opportunity for competitors or new players to their industry to swoop in and take their market share.
Vishay Intertechnology (VSH, Financial) is a semiconductor manufacturing company based in Malvern, Pennsylvania. It produces discrete semiconductors such as diodes, MOSFETS and optoelectronics, as well as passive electronic components such as resistors, inductors and capacitors.
During the quarter, 13 gurus bought shares of Vishay while only four sold the stock, resulting in nine net buys. As of the quarter’s end, 15 gurus held shares of the stock. According to the chart below, gurus have typically been bullish on this stock for the past year, with the exception of first-quarter 2021:
Ken Fisher (Trades, Portfolio) is the guru with the biggest stake in the company, owning 2.69% of shares outstanding. He is followed by Chuck Royce (Trades, Portfolio) with 2.58% and Jeremy Grantham (Trades, Portfolio) with 0.38%. Royce and Paul Tudor Jones (Trades, Portfolio) added to their positions in Vishay during the second quarter, while Steven Cohen (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) sold out of the stock entirely.
During the quarter, shares of Vishay traded for an average price of $24. As of Aug. 27, the stock trades around $22.57 with a 52-week range of $14.84 to $26.50. The GF Value chart rates the stock as fairly valued.
Vishay produces semiconductors and software support tools for a number of industries, including automotive, avionics, military, space, medical, computer and telecommunications. The company’s top and bottom lines have been fairly stagnant since 2010. Marketing itself as the “DNA of tech,” Vishay provides the components that are used in the designs of other companies, so it would likely only be able to achieve growth if more chip manufacturing were to begin among its target markets.
Indeed, this seems to be the situation that has been playing out with Vishay since the second quarter of 2020. In recent quarters, the company has reported a growing top and bottom line. In 2020 alone, global semiconductor sales increased 6.5% to $439 billion, according to the Semiconductor Industry Association. For the 2021 to 2026 period, the Semiconductor Industry Landscape report expects the market for semiconductors to see a compound annual growth rate of 6%, driven by consumer electronics, artificial intelligence, internet of things and advanced customized chips. If Vishay can take advantage of that growth, its price-earnings ratio of 13.91 seems unusually cheap.
Mosaic (MOS, Financial) is the world’s largest producer of potash and phosphate fertilizers, which are used as crop nutrients. The company mines phosphate in Florida and Peru and potash in New Mexico. It has its headquarters in Tampa, Florida.
During the quarter, 12 gurus bought shares of Mosaic while only three sold the stock, resulting in nine net buys. As of the quarter’s end, 15 gurus owned shares of the stock. The below chart shows that gurus have not been too enthusiastic about the stock until the most recent quarter:
Top guru shareholders of Mosaic include Pioneer Investments with 1.03% of shares outstanding, Donald Smith & Co. with 0.77% and Jeremy Grantham (Trades, Portfolio) with 0.76%. David Tepper (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) were buying shares of Mosaic in the second quarter, while John Rogers (Trades, Portfolio) and azValor Managers FI were among the sellers.
During the quarter, shares of Mosaic traded for an average price of $33.37. As of Aug. 27, the stock trades around $32.74 with a 52-week range of $16.01 to $38.23. The GF Value chart rates the stock as modestly overvalued.
Despite trading at a price-earnings ratio of only 8.86, which is far lower than the industry median of 18.86, the GF Value chart rates this stock as overvalued for several reasons. For one, the stock’s price has been on a steady downtrend since 2011, so investors are not enthusiastic about this stock at all. Additionally, both the top and bottom lines are fairly stagnant, and analysts are bearish on the stock, predicting lower revenue and earnings in the years ahead.
However, Mosaic sees opportunity in the continuing growth in demand for crop nutrients as major grower countries increase their orders for the company’s products. As the company mines for the components of its crop nutrients, it is bound to face significant volatility in terms of costs and output, but long-term growth in demand for food crops should drive overall company growth as the world population increases, becomes wealthier and fails to return nutrients to the soil, instead sending food waste as bagged trash to landfills.
IHS Markit (INFO, Financial) is a critical information provider based in the United Kingdom. It was formed from the 2016 merger of IHS Inc. and Markit Ltd. The company provides information, analytics and solutions for the major industries and markets that drive economies worldwide.
During the quarter, 10 gurus bought shares of IHS Markit while only one guru sold shares of the stock, resulting in nine net buys. As of the quarter’s end, 11 gurus hold shares of the stock. Gurus have been buying the stock more than selling it in recent years, with the exception of first-quarter 2021.
The most significant guru shareholder of the stock is George Soros (Trades, Portfolio) with 0.34% of shares outstanding, followed by Jeremy Grantham (Trades, Portfolio) with 0.33% and Pioneer Investments with 0.21%. Ron Baron (Trades, Portfolio) and Soros picked up shares of IHS Markit during the second quarter, while Joel Greenblatt (Trades, Portfolio) sold out of the stock.
During the quarter, shares of IHS Markit traded for an average price of $105.85. As of Aug. 27, the stock trades around $119.33 with a 52-week range of $76.04 to $120.64. The GF Value chart rates the stock as significantly overvalued.
IHS Markit is a powerful company in its own right as it provides critical information and solutions regarding global markets and economies. In general, it can be expected to continue its upwards growth trajectory as long as markets and economies have an increasing need for its services. History has shown that while IHS Markit’s top line may dip during recessions, its bottom line tends to spike as its margins improve.
The buzz currently surrounding IHS Markit is due largely to its upcoming acquisition by S&P Global. This past May, the two companies announced their intention to combine via an all-stock merger, with the deal expected to close in the fourth quarter of 2021. One of the largest financial services mergers in recent times, the deal aims to combine the two companies’ intelligence businesses to improve S&P Global’s ratings business, double its ESG business, provide entry to fixed-income indicators and create cost synergies.
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