Steven Scruggs (Trades, Portfolio), who manages the FPA Queens Road Small Cap Value Fund, disclosed its first-quarter 13F portfolio earlier this week.
In pursuit of long-term capital appreciation, the fund, which is part of Los Angeles-based First Pacific Advisors (Trades, Portfolio), applies a fundamental, bottom-up research process to invest in a diversified portfolio of small-cap companies. The stock picking strategy stems from Benjamin Graham’s principles of finding companies that trade at a discount to intrinsic value.
Keeping these considerations in mind, Scruggs revealed the fund established four new positions during the three months ended Feb. 28, sold out of three stocks and added to or trimmed a number of other existing investments. The new holdings are United Natural Foods Inc. (UNFI, Financial), Qorvo Inc. (QRVO, Financial), UGI Corp. (UGI, Financial) and Atlas Air Worldwide Holdings Inc. (AAWW, Financial).
Investors should be aware that the 13F filings do not give a complete picture of a firm’s holdings as they only include its positions in U.S. stocks and American depository receipts, but the reports can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
United Natural Foods
Scruggs invested in 192,121 shares of United Natural Foods (UNFI, Financial), allocating 1.78% of the equity portfolio to the holding. The stock traded for an average price of $40.96 per share during the quarter.
The Providence, Rhode Island-based company, which distributes health and specialty food in the U.S. and Canada, has a $2.54 billion market cap; its shares were trading around $43.59 on Monday with a price-earnings ratio of 11.39, a price-book ratio of 1.51 and a price-sales ratio of 0.1.
The GF Value Line suggests the stock is significantly overvalued currently based on its historical ratios, past financial performance and future earnings projections.
GuruFocus rated United Natural Foods’ financial strength 5 out of 10. Despite having weak interest coverage, the Altman Z-Score of 4.41 indicates the company is in good standing. 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 scored a 7 out of 10 rating. In addition to a declining operating margin, its returns on equity, assets and capital are overall underperforming versus competitors. United Natural Foods also has a high Piotroski F-Score of 7 out of 9, indicating conditions are healthy. The predictability rank of one out of five stars, however, is on watch as a result of revenue per share declining in recent years. According to GuruFocus data, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in United Natural Foods, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest position with 0.89% of its outstanding shares. John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and David Nierenberg (Trades, Portfolio) also own the stock.
Qorvo
The guru picked up 43,080 shares of Qorvo (QRVO, Financial), dedicating 1.2% of the equity portfolio to the position. Shares traded for an average price of $135.49 each during the quarter.
The semiconductor company headquartered in Greensboro, North Carolina, which provides foundry services and supplies radio-frequency systems for wireless and broadband communications applications, has a market cap of $12.48 billion; its shares were trading around $114.83 on Monday with a price-earnings ratio of 11.61, a price-book ratio of 2.67 and a price-sales ratio of 2.86.
According to the GF Value Line, the stock is significantly undervalued currently.
Qorvo’s financial strength was rated 7 out of 10 by GuruFocus. Although the company has issued new long-term debt over the past several years, it is manageable due to adequate interest coverage. The Altman Z-Score of 4.02 also indicates it is in good standing. Value is being created since the ROIC eclipses the WACC.
The company’s profitability scored a 6 out of 10 rating, driven by operating margin expansion and strong returns that top a majority of industry peers. Qorvo also has a moderate Piotroski F-Score of 6, meaning conditions are typical of a stable company.
With a 5.39% stake, Seth Klarman (Trades, Portfolio) is Qorvo’s largest guru shareholder. Other top guru investors include Steven Cohen (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Simons’ firm, Greenblatt and Paul Tudor Jones (Trades, Portfolio).
UGI
Having previously exited a position in UGI (UGI, Financial) in the second quarter of 2019, the investor entered a new 100,000-share holding, giving it 0.81% space in the equity portfolio. The stock traded for an average per-share price of $40.07 during the quarter.
The Pennsylvania-based natural gas and electric power distribution company has a $7.51 billion market cap; its shares were trading around $35.74 on Monday with a price-earnings ratio of 7.14, a price-book ratio of 1.46 and a price-sales ratio of 0.92.
Based on the GF Value Line, the stock appears to be modestly undervalued currently.
GuruFocus rated UGI’s financial strength 4 out of 10. Despite the company issuing new long-term debt over the past several years, it is at a manageable level as a result of sufficient interest coverage. The Altman Z-Score of 1.61, however, warns it could be at risk of bankruptcy since the company has recorded losses in operating income and revenue per share declines in recent years. Since the ROIC exceeds the WACC, value is being created.
The company’s profitability fared better, scoring a 7 out of 10 rating on the back of operating margin expansion, strong returns that top a majority of competitors and a moderate Piotroski F-Score of 6. UGI also has a one-star predictability rank.
First Eagle Investment (Trades, Portfolio) is UGI’s largest guru shareholder with a 4.12% stake. Diamond Hill Capital (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Keeley-Teton Advisors, LLC (Trades, Portfolio), Simons’ firm, Hussman, Ray Dalio (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) also own the stock.
Atlas Air Worldwide
Scruggs entered a 40,295-share investment in Atlas Air (AAWW, Financial), expanding the equity portfolio by 0.78%. During the quarter, the stock traded for an average price of $82.10 per share.
The aircraft leasing company, which is headquartered in Purchase, New York, has a market cap of $2.03 billion; its shares were trading around $69.55 on Monday with a price-earnings ratio of 4.33, a price-book ratio of 0.72 and a price-sales ratio of 0.52.
The GF Value Line suggests the stock is fairly valued currently.
Atlas Air’s financial strength was rated 5 out of 10 by GuruFocus. Despite the company having sufficient interest coverage, the Altman Z-Score of 1.78 warns it could be in danger of bankruptcy. The ROIC also surpasses the WACC, so value is being created.
The company’s profitability fared even better with an 8 out of 10 rating, driven by operating margin expansion, strong returns that top a majority of industry peers and a high Piotroski F-Score of 7. Atlas Air also has a one-star predictability rank.
Of the gurus invested in Atlas Air, Donald Smith & Co. has the largest stake with 4.3% of outstanding shares. David Einhorn (Trades, Portfolio), Fisher, Simons’ firm, Chuck Royce (Trades, Portfolio), Jones and several other gurus also have positions in the stock.
Additional trades and portfolio composition
During the quarter, Scruggs also reduced bets on Synaptics Inc. (SYNA, Financial) and South Jersey Industries Inc. (SJI, Financial) as well as added to holdings of TD Synnex Corp. (SNX, Financial), PVH Corp. (PVH, Financial), MasTec Inc. (MTZ, Financial) and MGIC Investment Corp. (MTG, Financial).
Nearly half of the guru’s $447 million equity portfolio, which is composed of 54 stocks, is invested in the financial services and technology sectors, followed by a smaller holding in the industrials space.
According to the website, the FPA Queens Road Small Cap Value Fund returned 23.19% in 2021, underperforming the Russell 2000 index’s 28.27% return.
