Chris Davis (Trades, Portfolio), leader of Davis Selected Advisors, disclosed his third-quarter portfolio last week.
With a patient, long-term approach, the guru’s Tucson, Arizona-based firm seeks to invest in durable, well managed companies that can be purchased at value prices, preferably when they are out of favor.
Based on these criteria, Davis established nine new positions during the three months ended Sept. 30, exited three stocks and added to or trimmed a number of other existing investments. His most notable trades included the divestment of New Oriental Education & Technology Group Inc. (EDU, Financial), reductions of the Alibaba Group Holding Ltd. (BABA, Financial) and Alphabet Inc. (GOOG, Financial) holdings and boosts to the JD.com Inc. (JD, Financial) and Cigna Corp. (CI, Financial) stakes.
New Oriental Education & Technology
After making additions to the position in both the first and second quarters, the investor dumped all 106.4 million shares of New Oriental Education & Technology (EDU, Financial), impacting the equity portfolio by -3.58%. The stock traded for an average price of $3.23 per share during the quarter.
GuruFocus estimates Davis lost 29.97% on the investment, which was established in the second quarter of 2016.
The Chinese company, which provides private educational programs and services, has a $3.63 billion market cap; its shares were trading around $2.14 on Monday with a price-earnings ratio of 10.7, a price-book ratio of 0.75 and a price-sales ratio of 0.83.
The GF Value Line suggests the stock is a possible value trap currently, so investors should proceed with caution before investing in the stock as a result of the Chinese government’s recent crackdown on tech and educational stocks. The exclusive metric is based on the company’s historical ratios, past performance and future earnings projections.
GuruFocus rated New Oriental’s financial strength 5 out of 10. Despite having a comfortable level of interest coverage, the Altman Z-Score of 1.62 warns the company could be at risk of bankruptcy since its assets are building up at a faster rate than revenue is growing. The weighted average cost of capital also overshadows the return on invested capital, indicating the company is struggling to create value while growing.
The company’s profitability scored a 9 out of 10 rating. Even though the operating margin is in decline, the returns on equity, assets and capital outperform over half of its competitors. New Oriental is also supported by a moderate Piotroski F-Score of 5 out of 9, meaning business conditions are typical for a stable company. The predictability rank of five out of five stars, however, is on watch even though the company has recorded consistent earnings and revenue growth. According to GuruFocus, companies with this rank returned an average of 12.1% annually over a 10-year period.
Of the gurus invested in New Oriental, Chase Coleman (Trades, Portfolio) has the largest stake with 0.54% of its outstanding shares. Pioneer Investments, Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Ray Dalio (Trades, Portfolio)’s Bridgewater Associates also have large positions in the stock.
Alibaba
Impacting the equity portfolio by -2.87%, Davis curbed his stake in Alibaba (BABA, Financial) by 70.5%, selling 3.07 million shares. During the quarter, shares traded for an average price of $182.30 each.
The guru now holds 1.3 million shares total, giving it 0.88% space in the equity portfolio. GuruFocus data shows he has gained 0.61% on the investment since the fourth quarter of 2016.
The e-commerce giant based in China has a market cap of $452.91 billion; its shares were trading around $167.17 on Monday with a price-earnings ratio of 20.37, a price-book ratio of 2.99 and a price-sales ratio of 3.92.
According to the GF Value Line, the stock is significantly undervalued currently.
Alibaba’s financial strength was rated 7 out of 10 by GuruFocus. The company has a good cash-debt ratio, a comfortable level of interest coverage and a robust Altman Z-Score of 4.32, indicating it is in good standing. The ROIC also eclipses the WACC, indicating value creation is occurring.
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. Despite recording consistent earnings and revenue growth, the predictability rank of three out of five stars is on watch. GuruFocus says companies with this rank return an average of 8.2% annually.
PRIMECAP Management (Trades, Portfolio) is Alibaba’s largest guru shareholder with a 0.58% stake. Other top guru investors include Ken Fisher (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Dodge & Cox, Pioneer Investments, Frank Sands (Trades, Portfolio), Coleman, Al Gore (Trades, Portfolio), Ron Baron (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio).
Alphabet
With an impact of -1.70% on the equity portfolio, the investor trimmed his Alphabet (GOOG, Financial) position by 36.24%, selling 164,850 shares. The stock traded for an average per-share price of $2,756.72 during the quarter.
Davis now holds 290,077 Class C shares, representing 3.57% of the equity portfolio and is the 10th-largest holding. GuruFocus says he has gained around 149.41% on the investment.
Headquartered in Mountain View, California, the parent company of the Google search engine and YouTube has a $1.98 trillion market cap; its shares were trading around $3,007.18 on Monday with a price-earnings ratio of 28.66, a price-book ratio of 8.09 and a price-sales ratio of 8.46.
Based on the GF Value Line, the stock appears to be significantly overvalued currently.
GuruFocus rated Alphabet’s financial strength 8 out of 10. In addition to comfortable interest coverage, the company is supported by a robust Altman Z-score of 13.99. The ROIC also surpasses the WACC, indicating good value creation is occurring.
The company’s profitability scored a 10 out of 10 rating. Even though the operating margin is in decline, Alphabet is supported by strong returns that outperform a majority of competitors as well as a high Piotroski F-Score of 8, meaning business conditions are healthy. Boosted by consistent earnings and revenue growth, the company also has a five-star predictability rank.
With a 0.32% stake, Dodge & Cox is the largest guru shareholder of Alphabet’s Class C stock. Pioneer Investments, Primecap Management, Baillie Gifford (Trades, Portfolio), Gore, Spiros Segalas (Trades, Portfolio), Tom Russo (Trades, Portfolio) and many other gurus also own the stock.
JD.com
The guru upped his stake in JD.com (JD, Financial) by 255.48%, investing in 8.6 million shares. The transaction expanded the equity portfolio by 2.86%. The stock traded for an average price of $73.86 per share during the quarter.
Davis now holds 11.9 million shares, accounting for 3.98% of the equity portfolio and his eighth-largest holding. He has gained an estimated 35.47% on the investment so far according to GuruFocus.
The Chinese e-commerce company has a market cap of $131.82 billion; its shares were trading around $84.25 on Monday with a price-earnings ratio of 24.71, a price-book ratio of 3.9 and a price-sales ratio of 1.04.
The GF Value Line suggests the stock is significantly overvalued currently.
JD.com’s financial strength was rated 7 out of 10 by GuruFocus, driven by adequate interest coverage and a high Altman Z-Score of 4.46. The ROIC, however, is overshadowed by the WACC, suggesting issues with creating value.
The company’s profitability did not fare as well, scoring a 4 out of 10 rating. Even though returns top over half of its industry peers, the operating margin is underperforming versus other companies. JD.com also has a high Piotroski F-Score of 7.
Of the gurus invested in JD.com, Coleman has the largest stake with 3.31% of its outstanding shares. Andreas Halvorsen (Trades, Portfolio), Fisher, Dodge & Cox, Pioneer Investments, Daniel Loeb (Trades, Portfolio), Catherine Wood (Trades, Portfolio) and several other gurus also have large positions in the stock.
Cigna
Davis increased his Cigna (CI, Financial) stake by 187.01%, picking up 2.2 million shares. The transaction impacted the equity portfolio by 2.01%. During the quarter, shares traded for an average price of $217.75 each.
The guru now holds 3.3 million shares total, which make up 3.09% of the equity portfolio. He has gained an estimated 2.23% on the investment since the fourth quarter of 2018 according to GuruFocus.
The health insurance company, which is based in Bloomfield, Connecticut, has a $72.19 billion market cap; its shares were trading around $217.83 on Monday with a price-earnings ratio of 9.21, a price-book ratio of 1.52 and a price-sales ratio of 0.44.
According to the GF Value Line, the stock appears to be modestly undervalued currently.
GuruFocus rated Cigna’s financial strength 4 out of 10. Although it has adequate interest coverage, the company is weighed down by debt-related ratios that are underperforming versus other industry players. Value is being created, however, since the ROIC slightly outperforms the WACC.
The company’s profitability scored a 7 out of 10 rating, driven by strong margins and returns that top over half of its competitors. It also has a high Piotroski F-Score of 7 as well as a one-star predictability rank.
Dodge & Cox is Cigna’s largest guru shareholder with a 4.27% stake. Larry Robbins (Trades, Portfolio), Pioneer Investments, Jeremy Grantham (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio) and Richard Pzena (Trades, Portfolio) are some of the other guru shareholders.
Additional trades and performance
During the quarter, Davis also reduced his holdings of Capital One Financial Corp. (COF, Financial), Meta Platforms Inc. (FB, Financial), Amazon.com Inc. (AMZN, Financial) and American Express Co. (AXP, Financial) as well as added to Darling Ingredients Inc. (DAR, Financial).
The guru’s $21.63 billion equity portfolio, which is composed of 120 stocks, is most heavily invested in the financial services sector.
In 2020, the firm returned -5.88%, significantly underperforming the S&P 500’s 18.4% return.
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