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Bill Nygren's Top 5 Trades of the 2nd Quarter

Guru buys Intercontinental Exchange, gives 2 stocks the boot

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Sydnee Gatewood
Aug 30, 2021

Summary

  • Guru sold out of MGM Resorts and Caterpillar.
  • Nygren also added to the Fiserv and ConocoPhillips stakes.
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Oakmark Fund manager

Bill Nygren (Trades, Portfolio) disclosed his second-quarter portfolio earlier this week.

To achieve long-term capital appreciation, the renowned guru, who also manages the Chicago-based firm’s Select and Global Select funds, usually invests in mid- and large-cap companies. When picking stocks, he looks for growing companies that have shareholder-oriented management teams. According to the fund’s fact sheet, he prefers to take a position when the stock is trading at a substantial discount to his estimate of intrinsic value, then waits for the gap between the two to close before selling.

In his market commentary for the second quarter, Nygren discussed the firm’s research process and the importance of corporate governance, highlighting that one of the “most important parts” is “getting to know the people running the businesses.” While the Covid-19 pandemic prevented face-to-face engagements, he noted Oakmark analysts resumed traveling in May.

“In conclusion, commonly cited good governance checklists barely scratch the surface of what we want to know about the businesses we own,” he wrote. “When you expect to own a company for five or more years, like we do at Oakmark, accurately assessing corporate governance is just as important as accurately valuing the business.”

Keeping these considerations in mind, Nygren established one new position during the three months ended June 30, sold out of two stocks and added to or trimmed a number of other existing investments. Notable trades included a new stake in Intercontinental Exchange Inc. (

ICE, Financial), the divestment of MGM Resorts International (MGM, Financial) and Caterpillar Inc. (CAT, Financial) as well as increased bets on Fiserv Inc. (FISV, Financial) and ConocoPhillips (COP, Financial).

Intercontinental Exchange

The guru invested in a 1.3 million-share stake in Intercontinental Exchange (

ICE, Financial), allocating it to 0.94% of the equity portfolio. The stock traded for an average price of $115 per share during the quarter.

The Atlanta-based company, which operates global exchanges and clearing houses and provides mortgage technology, data and listing services, has a $67.23 billion market cap; its shares were trading around $119.77 on Monday with a price-earnings ratio of 23.88, a price-book ratio of 3.19 and a price-sales ratio of 7.68.

The GF Value Line shows the stock is fairly valued currently based on its historical ratios, past performance and future earnings projections.

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In his quarterly commentary, Nygren noted the company “exhibits attractive economic characteristics.”

“We believe a business with Intercontinental Exchange’s strong competitive position, excellent management team and attractive growth outlook deserves to trade well above a market multiple,” he added.” We like buying great businesses at average prices and believe Intercontinental Exchange represents a compelling opportunity to do just that.”

GuruFocus rated Intercontinental Exchange’s financial strength 3 out of 10. Despite issuing approximately $7.5 billion in new long-term debt over the past three years, the company has adequate interest coverage. The Altman Z-Score of 0.68, however, warns the company could be in danger of going bankrupt. The return on invested capital is also being overshadowed by the weighted average cost of capital, indicating the company has issues with creating value as it grows.

The company’s profitability fared better, scoring an 8 out of 10 rating on the back of an expanding operating margin and returns on equity, assets and capital that outperform over half of its competitors. Intercontinental also has a moderate Piotroski F-Score of 4, indicating conditions are typical for a stable company. Consistent earnings and revenue growth has contributed to a predictability rank of four out of five stars. According to GuruFocus, companies with this rank return an average of 9.8% annually over a 10-year period.

Of the gurus invested in Intercontinental Exchange, Pioneer Investments has the largest stake with 0.76% of outstanding shares.

Ruane Cunniff (Trades, Portfolio), Catherine Wood (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Frank Sands (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), George Soros (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) also have positions in the stock.

MGM Resorts International

With an impact of -2.21% on the equity portfolio, Nygren dumped all 8.6 million shares of MGM Resorts International (

MGM, Financial). Shares traded for an average price of $41.31 each during the quarter.

GuruFocus estimates he gained 55.86% on the investment, which was established in the third quarter of 2016.

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The global hospitality and entertainment company, which is headquartered in Las Vegas, has a market cap of $20.74 billion; its shares were trading around $42.97 on Monday with a price-book ratio of 3.39 and a price-sales ratio of 3.26.

According to the GF Value line, the stock is significantly overvalued currently.

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In his commentary, Nygren said at the time of the initial purchase, the company’s valuation “did not reflect the improving fundamentals of the Las Vegas Strip” and the quality of its assets was being ignored.

“The exuberance surrounding digital gaming, coupled with expectations for a strong post-pandemic recovery in Las Vegas, has lifted the stock price to our estimate of intrinsic value,” he wrote. “Therefore, we sold our shares in favor of more attractively priced alternatives.”

MGM’s financial strength was rated 3 out of 10 by GuruFocus. As a result of the company issuing approximately $65.8 million in new long-term debt over the past several years, it has weak interest coverage. The Altman Z-Score of 0.85 warns the company could be at risk of going bankrupt if it does not improve its liquidity.

The company’s profitability scored a 5 out of 10 rating. In addition, negative margins and returns are underperforming at least half of its industry peers. MGM also has a moderate Piotroski F-Score of 4, but losses in operating income and declines in revenue per share over the past several years contributed to the one-star predictability rank being on watch. GuruFocus says companies with this rank return an average of 1.1% annually.

With a 1.17% stake,

Mason Hawkins (Trades, Portfolio) is the company’s largest guru shareholder. Other guru investors are Barrow, Hanley, Mewhinney & Strauss, Lee Ainslie (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Pioneer Investments, Soros, Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Greenblatt.

Caterpillar

Impacting the equity portfolio by -2.21%, the investor exited his 1.42 million-share stake in Caterpillar (

CAT, Financial). The stock traded for an average per-share price of $231.15 during the quarter.

GuruFocus data shows Nygren gained an estimated 77.76% on the investment, which was established in the first quarter of 2015.

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The Deerfield, Illinois-based company, which manufactures construction machinery and equipment, has a $116.1 billion market cap; its shares were trading around $212.36 on Monday with a price-earnings ratio of 26.61, a price-book ratio of 6.89 and a price-sales ratio of 2.53.

Based on the GF Value Line, the stock appears to be significantly overvalued currently.

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Nygren mentioned in his commentary that despite being a high-quality business, Caterpillar is in a cyclical industry.

“Our ability to focus on the long-term, sustainable earnings power of a business (rather than getting distracted by near-term fluctuations) is our most significant edge when investing in cyclical businesses,” he said. “Due to the inherent volatility in Caterpillar’s end markets and operating performance, we suspect we’ll have a future opportunity to own this high-quality business at a more attractive price once the cycle turns and today’s enthusiasm wears off.”

GuruFocus rated Caterpillar’s financial strength 5 out of 10. Although the company has issued approximately $1.7 billion in new long-term debt over the past three years, it is still manageable due to a sufficient level of interest coverage. The Altman Z-Score of 2.75, however, indicates the company is under some pressure even though the ROIC eclipses the WACC, indicating value is being created.

The company’s profitability scored a 7 out of 10 rating, driven by an expanding operating margin and strong returns that outperform a majority of competitors. Caterpillar also has a high Piotroski F-Score of 8, which indicates business conditions are healthy. Despite recording a slowdown in revenue per share growth over the past 12 months, it has a one-star predictability rank.

Bill Gates (Trades, Portfolio)’ foundation trust has the largest stake in Caterpillar with 1.86% of outstanding shares. Other major guru investors are Ken Fisher (Trades, Portfolio), Primecap Management, Pioneer Investments, Diamond Hill Capital (Trades, Portfolio) and Simons’ firm.

Fiserv

Nygren upped his Fiserv (

FISV, Financial) stake by 57.5%, buying 1.15 million shares. The transaction had an impact of 0.75% on the equity portfolio. During the quarter, the stock traded for an average price of $116.37 per share.

The guru now holds 3.15 million shares, accounting for 2.06% of the equity portfolio. GuruFocus said he has gained 2.84% on the investment so far.

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The financial technology and payments company, which is headquartered in Brookfield, Wisconsin, has a market cap of $77.38 billion; its shares were trading around $116.80 on Monday with a price-earnings ratio of 69.55, a price-book ratio of 2.43 and a price-sales ratio of 5.14.

The GF Value Line suggests the stock is modestly undervalued currently.

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Fiserv’s financial strength was rated 3 out of 10 by GuruFocus. As a result of issuing approximately $14.1 billion in new long-term debt over the past three years, the company has weak interest coverage. The Altman Z-Score of 1.65 also warns the company could be in danger of going bankrupt if it doesn’t improve its liquidity. It may be becoming less efficient since assets are building up at a faster rate than revenue is growing. The WACC also exceeds the ROIC, indicating issues with creating value.

The company’s profitability fared much better, scoring an 8 out of 10 rating. In addition to a declining operating margin, Fiserv is being weighed down by returns that underperform slightly over half of its industry peers. It also has a moderate Piotroski F-Score of 6, but has recorded a slowdown in revenue per share growth over the past year. Fiserv is supported by a 2.5-star predictability rank. GuruFocus data shows companies with this rank return an average of 7.3% annually.

Dodge & Cox is the company’s largest guru shareholder with a 3.47% stake.

ValueAct Holdings LP (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio) and Leon Cooperman (Trades, Portfolio) also have significant positions in Fiserv.

ConocoPhillips

The guru increased the ConocoPhillips (

COP, Financial) stake by 92.75%, buying 1.9 million shares. The transaction had an impact of 0.74% on the equity portfolio. During the quarter, shares traded for an average price of $55.67 each.

Nygren now holds 4.15 million shares total, which represent 1.54% of the equity portfolio. GuruFocus says he has gained around 8.16% on the investment since establishing it in the first quarter of the year.

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The Houston-based oil and gas company has a $76.29 billion market cap; its shares were trading around $56.83 on Monday with a price-earnings ratio of 49.11, a price-book ratio of 1.73 and a price-sales ratio of 2.38.

According to the GF Value Line, the stock is modestly overvalued currently.

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GuruFocus rated ConocoPhillips’ financial strength 5 out of 10. In addition to poor interest coverage, the Altman Z-Score of 2.53 indicates the company is under some pressure. The ROIC has also fallen below the WACC, indicating struggles with creating value.

The company’s profitability scored a 6 out of 10 rating on the back of margins and returns that beat over half of its competitors. ConocoPhillips also has a moderate Piotroski F-Score of 5, but the one-star predictability rank is on watch as a result of revenue per share declining over the past three years.

Of the gurus invested in ConocoPhillips, Dodge & Cox has the largest stake with 1.67% of outstanding shares. Other gurus with significant holdings are Fisher, Pioneer Investments,

Yacktman Asset Management (Trades, Portfolio), the Smead Value Fund (Trades, Portfolio) and Elfun Trusts (Trades, Portfolio).

Additional trades and portfolio performance

Other notable trades for the quarter include significant additions to the eBay Inc. (

EBAY, Financial), Altria Group Inc. (MO, Financial) and Netflix Inc. (NFLX, Financial) positions as well as a reduction in the Bank of America Corp. (BAC, Financial) and Ally Financial Inc. (ALLY, Financial) holdings.

Oakmark’s $16.38 billion equity portfolio, which is composed of 50 stocks, is largely invested in the financial services sector with a weight of 36.76%, followed by smaller positions in the communication services (15.97%) and technology (10.05%) spaces.

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GuruFocus data shows the Oakmark Fund returned 12.9% in 2020, slightly underperforming the S&P 500’s return of 18.4%.

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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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