The Parnassus Endeavor Fund (Trades, Portfolio) released its third-quarter portfolio earlier this week, revealing potential value opportunities as supply chain disruptions and other economic headwinds continue to impact the market.
The fund, which is part of Jerome Dodson (Trades, Portfolio)’s San Francisco-based Parnassus Investments, avoids investing in fossil fuel-related stocks. Rather, it prefers companies that have exemplary work environments and are known for being socially and environmentally responsible. With the goal of capital appreciation, the portfolio managers invest in discounted large-cap companies that have strong competitive advantages, relevant products and quality management teams.
Earlier this year, Dodson stepped down from managing the funds, but remains chairman of the board. Then, in July, Affiliated Managers Group announced it was paying $600 million to acquire a majority stake in Parnassus Investments, so additional changes could be on the way for the firm and its funds.
With these criteria in mind, the fund established two new positions during the quarter, sold out of one holding and added to or trimmed a handful of other existing investments. Among its most notable trades were new holdings in PepsiCo Inc. (PEP, Financial) and VMware Inc. (VMW, Financial), reductions in its Charles Schwab Corp. (SCHW, Financial) and Discover Financial Services (DFS, Financial) positions and a boost to its Omnicom Group Inc. (OMC, Financial) stake.
PepsiCo
The fund invested in 915,459 shares of PepsiCo (PEP, Financial), allocating 2.85% of the equity portfolio to the position. The stock traded for an average price of $154.73 per share during the quarter. It is now Parnassus’ seventh-largest holding.
The Purchase, New York-based food, snack and beverage company, which owns popular brands like Pepsi, Mountain Dew, Doritos and Lays, has a $220.89 billion market cap; its shares were trading around $159.65 on Thursday with a price-earnings ratio of 27.21, a price-book ratio of 13.92 and a price-sales ratio of 2.89.
The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past performance and future earnings projections.
GuruFocus rated PepsiCo’s financial strength 4 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 3.93, which indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also overshadows the weighted average cost of capital, meaning value is being created as the company grows.
The company’s profitability fared even better with an 8 out of 10 rating. Although its margins are in decline, PepsiCo is supported by strong returns on equity, assets and capital that outperform a majority of competitors. It also has a moderate Piotroski F-Score of 6 out of 9, meaning conditions are typical for a stable company, as well as a predictability rank of three out of five stars as a result of consistent earnings and revenue growth.
Of the gurus invested in PepsiCo, Pioneer Investments has the largest stake with 0.47% of outstanding shares. Yacktman Asset Management (Trades, Portfolio)’s funds, Diamond Hill Capital (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) also have significant positions in the stock.
VMware
Parnassus picked up 727,616 shares of VMware (VMW, Financial), dedicating 2.24% of the equity portfolio to the holding. During the quarter, shares traded for an average price of $151.63 each.
The cloud computing and virtualization company, which is headquartered in Palo Alto, California, has a market cap of $68.67 billion; its shares were trading around $164.21 on Thursday with a price-earnings ratio of 33.67, a price-book ratio of 7.14 and a price-sales ratio of 5.65.
According to the GF Value Line, the stock is fairly valued currently.
VMware’s financial strength was rated 5 out of 10 by GuruFocus. In addition to sufficient interest coverage, the Altman Z-Score of 3.2 indicates the company is in good standing even though its assets are building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, indicating value is being created.
The company’s profitability scored a 8 out of 10 rating. Although the operating margin is in decline, VMware is supported by strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. Steady earnings and revenue growth contributed to a perfect five-star predictability rank.
With a 1.71% stake, Dodge & Cox is the company’s largest guru shareholder. Other top guru investors include PRIMECAP Management (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Dalio and Jeremy Grantham (Trades, Portfolio).
Charles Schwab
Impacting the equity portfolio by -0.91%, the Endeavor Fund curbed its Charles Schwab (SCHW, Financial) stake by 20.34%, selling 602,822 shares. The stock traded for an average per-share price of $71.45 during the quarter.
It now holds 2.36 million shares total, accounting for 3.55% of the equity portfolio. After becoming the largest position in the second quarter, it is now the fund’s third-largest holding. GuruFocus estimates Parnassus has gained 38.56% on the investment over its lifetime.
The Westlake, Texas-based company, which offers banking, online brokerage and wealth management advisory services, has a $154.89 billion market cap; its shares were trading around $81.99 on Thursday with a price-earnings ratio of 31.2, a price-book ratio of 3.25 and a price-sales ratio of 8.6.
Based on the GF Value Line, the stock appears to be significantly overvalued currently.
GuruFocus rated Charles Schwab’s financial strength 3 out of 10. Although the company has issued new long-term debt over the past several years, it is at a manageable level.
The company’s profitability fared a bit better, scoring a 6 out of 10 rating on the back of margins and returns that outperform over half of its competitors as well as a moderate Piotroski F-Score of 5. Despite recording a slowdown in revenue per share growth, Charles Schwab has a 4-star predictability rank.
Dodge & Cox is Charles Schwab’s largest guru shareholder with a 3.98% stake. PRIMECAP Management (Trades, Portfolio), Al Gore (Trades, Portfolio), Pioner Investments, Ruane Cunniff (Trades, Portfolio), Ron Baron (Trades, Portfolio), Diamond Hill, First Eagle Investment (Trades, Portfolio), Yacktman, the T Rowe Price Equity Income Fund (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), Mairs and Power (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) also have significant holdings.
Discover Financial Services
With an impact of -0.60% on the equity portfolio, the fund trimmed its Discover Financial Services (DFS, Financial) position by 23.25%, selling 242,592 shares. During the quarter, the stock traded for an average price of $125.25 per share.
Parnassus now holds 800,869 shares total, which represent 2.03% of the equity portfolio. GuruFocus data shows the fund has gained an estimated 174.72% on the investment since the second quarter of 2020.
The credit card company, which is headquartered in Riverwoods, Illinois, has a market cap of $37.78 billion; its shares were trading around $125.98 on Thursday with a price-earnings ratio of 8.08, a price-book ratio of 3.14 and a price-sales ratio of 3.23.
The GF Value Line suggests the stock is significantly overvalued currently.
Discover’s financial strength was rated 3 out of 10 by GuruFocus on the back of debt-related ratios that are underperforming versus other industry players as well as its own history.
The company’s profitability fared better with a 6 out of 10 rating, driven by margins and returns that outperform over half of its industry peers and a high Piotroski F-Score of 9 that indicates business conditions are healthy. Discover also has a four-star predictability rank.
Of the gurus invested in Discover, PRIMECAP has the largest stake with 1.37% of its outstanding shares. Addition guru shareholders are Barrow, Hanley, Mewhinney & Strauss, Hotchkis & Wiley, Pioneer Investments, Grantham and Diamond Hill Capital (Trades, Portfolio).
Omnicom Group
Parnassus upped its stake in Omnicom Group (OMC, Financial) by 29.25%, buying 389,615 shares. The transaction expanded the equity portfolio by 0.58%. Shares traded for an average price of $74.39 each during the quarter.
The fund now holds 1.7 million shares total, which make up 2.58% of the equity portfolio. GuruFocus says Dodson’s fund has gained an estimated 1.75% on the investment since the first quarter of the year.
The New York-based diversified media company, which provides advertising, customer relationship management, public relations and specialty services, has a $15.3 billion market cap; its shares were trading around $71.97 on Thursday with a price-earnings ratio of 11.22, a price-book ratio of 4.62 and a price-sales ratio of 1.1.
According to the GF Value Line, the stock is fairly valued currently.
GuruFocus rated Omnicom’s financial strength 4 out of 10. Despite the company issuing approximately $333.1 million in new long-term debt over the past three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 1.72, however, warns it could be at risk of going bankrupt if it does not improve its liquidity. The ROIC exceeds the WACC, indicating value creation is occurring.
The company’s profitability scored a 7 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 8. Although Omnicom has recorded a decline in revenue per share over the past three years, it still has a one-star predictability rank.
Pioneer Investments is the company’s largest guru shareholder with a 1.46% stake. Hotchkis & Wiley and Simons’ firm also have large positions in Omnicom.
Additional trades and portfolio performance
During the three months ended Sept. 30, the Endeavor Fund also divested of its Cadence Design Systems Inc. (CDNS, Financial) position, added to the Merck & Co. Inc. (MRK, Financial), Novartis AG (NVS, Financial) and Intel Corp. (INTC, Financial) stakes and curbed its holding of Capital One Financial Corp. (COF, Financial).
Over 70% of Parnassus’ $4.84 billion equity portfolio, which is composed of 42 stocks, is invested in the technology, health care and financial services sectors.
The fund posted a return of 27.42% in 2020, topping the S&P 500 Index’s 18.4% return.
