Muhlenkamp & Co. Inc., the investment firm founded by Ronald Muhlenkamp (Trades, Portfolio) in 1977, released its equity portfolio for the second quarter earlier this week.
While he is still acting as the firm’s chairman, Muhlenkamp passed most operational responsibilities on to his sons in 2019. With the goal of maximizing returns through capital appreciation, as well as income from dividends and interest, his Wexford, Pennsylvania-based firm typically invests in highly profitable companies trading at a discount. When picking stocks, it seeks companies with strong balance sheets and high returns on equity. The firm believes that, over time, stock prices reflect the companies’ underlying value and that the long-term business of investing offers a higher chance of profitability and reliability.
In his quarterly letter to shareholders, Muhlenkamp noted he expects “inflation and higher interest rates to generally drive asset prices lower in the bond and equity markets” as well as “a financial crisis of some sort to develop.”
“Considering this admittedly pessimistic outlook, we are holding a fair bit of cash,” he wrote. “Our goal is to deploy it in good companies at excellent prices when others retreat from the market. With the Federal Reserve still increasing the price of borrowing and withdrawing cash from the system we think that opportunity is ahead of us.”
Based on these considerations, the firm disclosed in its 13F filing it sold out of eight stocks, added to five positions and trimmed a slew of other existing holdings during the three months ended June 30. The most notable trades included a reduction of the McKesson Corp. (MCK, Financial) holding as well as the divestment of WESCO International Inc. (WCC, Financial), Lockheed Martin Corp. (LMT, Financial), Meritage Homes Corp. (MTH, Financial) and Lennar Corp. (LEN, Financial).
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they 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.
McKesson
Muhlenkamp’s firm curbed its position in McKesson (MCK, Financial) by 42.18%, selling 27,661 shares. The transaction had an impact of -2.95% on the equity portfolio. The stock traded for an average price of $319.73 per share during the quarter.
It now holds 37,924 shares total, accounting for 5.79% of the equity portfolio and is now the fifth-largest holding after holding the top spot the quarter before. The firm has gained an estimated 84.34% on the investment so far according to GuruFocus.
The Irving, Texas-based company, which is a pharmaceutical distributor and provider of health information technology, medical supplies and care management tools, has a $46.94 billion market cap; its shares were trading around $326.69 on Wednesday with a price-earnings ratio of 45.35 and a price-sales ratio of 0.19.
The GF Value Line suggests the stock is significantly overvalued based on historical ratios, past financial performance and future earnings projections.
GuruFocus rated McKesson’s financial strength 7 out of 10. In addition to adequate interest coverage, the Altman Z-Score of 4.87 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 an 8 out of 10 rating. Although its margins are in decline, the returns on equity, assets and capital are overall outperforming versus competitors. McKesson also has a high Piotroski F-Score of 7 out of 9, meaning operations are healthy, and a predictability rank of one out of five stars. According to GuruFocus research, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in McKesson, Warren Buffett (Trades, Portfolio) has the largest stake with 2.01% of its outstanding shares. Richard Pzena (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Arnold Van Den Berg (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Ron Baron (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) also own the stock.
WESCO International
Having reduced the holding over the past several quarters, the firm dumped its 78,911 remaining shares of WESCO International (WCC, Financial), which had an impact of -3.58% on the equity portfolio. Shares traded for an average price of $123.34 each during the quarter.
GuruFocus estimates the fund gained 114.26% on the investment, which ended 2021 as its top holding.
The industrial distributor headquartered in Pittsburgh has a market cap of $5.65 billion; its shares were trading around $111 on Wednesday with a price-earnings ratio of 10.96, a price-book ratio of 1.41 and a price-sales ratio of 0.30.
According to the GF Value Line, the stock appears to be fairly valued currently.
WESCO International’s financial strength was rated 5 out of 10 by GuruFocus. As a result of issuing new long-term debt over the past several years, the company has weak interest coverage. The Altman Z-Score of 2.73 indicates the company is under some pressure since assets are building up at a faster rate than revenue is growing. The WACC also exceeds the ROIC, so WESCO is struggling to create value.
The company’s profitability fared better, scoring an 8 out of 10 rating. Although the operating margin is in decline, returns are outperforming versus industry peers. WESCO has a moderate Piotroski F-Score of 5, suggesting conditions are typical for a stable company, and, due to consistent earnings and revenue growth, a two-star predictability rank. GuruFocus data shows companies with this rank return an average of 6% annually.
With a 4.09% stake, Diamond Hill Capital (Trades, Portfolio) is the company’s largest guru shareholder. Other guru investors include Chuck Royce (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
Lockheed Martin
Impacting the equity portfolio by -3.01%, Muhlenkamp’s firm sold all 19,605 shares of Lockheed Martin (LMT, Financial). During the quarter, the stock traded for an average per-share price of $439.13.
GuruFocus estimates the firm lost 7.05% on the investment over its lifetime.
The Bethesda, Maryland-based aerospace and defense company has a $104.52 billion market cap; its shares were trading around $394.70 on Wednesday with a price-earnings ratio of 17.34, a price-book ratio of 10.41 and a price-sales ratio of 1.64.
Based on the GF Value Line, the stock appears to be fairly valued currently.
GuruFocus rated Lockheed Martin’s financial strength 6 out of 10. In addition to a comfortable level of interest coverage, the company’s Altman Z-Score of 3.95 indicates it is in good standing. The ROIC also surpasses the WACC, implying good value creation is occurring.
The company’s profitability fared even better with an 8 out of 10 rating. On top of operating margin expansion, its returns outperform a majority of competitors. Lockheed Martin also has a moderate Piotroski F-Score of 5 and a 2.5-star predictability rank, which is on watch as a result of revenue per share growth slowing down over the past 12 months. GuruFocus says companies with this rank return an average of 7.3% annually.
Simons’ firm has the largest position in Lockheed Martin with 0.14% of its outstanding shares. Yacktman Asset Management (Trades, Portfolio), Dalio, Catherine Wood (Trades, Portfolio), Greenblatt, Louis Moore Bacon (Trades, Portfolio), John Rogers (Trades, Portfolio) and several other gurus also hold the stock.
Meritage Homes
With an impact of -2.68% on the equity portfolio, the firm exited its 97,114-share holding of Meritage Homes (MTH, Financial). The stock traded for an average price of $79.81 per share during the quarter.
The firm gained an estimated 59.13% on the investment according to GuruFocus.
The homebuilder headquartered in Scottsdale, Arizona has a market cap of $3.05 billion; its shares were trading around $83.37 on Wednesday with a price-earnings ratio of 3.84, a price-book ratio of 0.96 and a price-sales ratio of 0.60.
The GF Value Line suggests the stock, while undervalued, is a possible value trap currently. As such, potential investors should do thorough research before making a decision.
Meritage Homes’ financial strength was rated 8 out of 10, driven by a comfortable level of interest coverage and a high Altman Z-Score of 4.56. The ROIC also eclipses the WACC, so value is being created.
The company’s profitability scored a 9 out of 10 rating on the back of an expanding operating margin and returns that top a majority of industry peers. Meritage Homes also has a moderate Piotroski F-Score of 6. Steady earnings and revenue growth contributed to a four-star predictability rank. Based on GuruFocus research, companies with this rank return an annual average of 9.8%.
Of the gurus invested in Meritage Homes, Fisher has the largest stake with a 3.18% stake. Hotchkis & Wiley, Royce and Grantham also have positions in the homebuilder.
Lennar
Muhlenkamp’s firm closed out of its 68,866-share Lennar (LEN, Financial) position, which had an impact of -1.95% on the equity portfolio. Shares traded for an average price of $75.78 each during the quarter.
GuruFocus estimates show the firm gained 32.66% on the investment.
The Miami-based homebuilder has a $22.46 billion market cap; its shares were trading around $79.13 on Wednesday with a price-earnings ratio of 5.41, a price-book ratio of 1.06 and a price-sales ratio of 0.79.
According to the GF Value Line, the stock is modestly undervalued currently.
GuruFocus rated Lennar’s financial strength 6 out of 10. While assets are building up at a faster rate than revenue is growing, the Altman Z-Score of 4.05 indicates the company is in good standing. The ROIC is also higher than the WACC, indicating good value creation is occurring.
The company’s profitability fared even better with a 9 out of 10 rating, driven by expanding margins, strong returns that outperform competitors, a high Piotroski F-Score of 7 and a 3.5-star predictability rank as revenue and earnings growth has been consistent. GuruFocus data shows companies with this rank return an average of 9.3% annually.
With a 0.64% stake, the Smead Value Fund (Trades, Portfolio) is the company’s largest guru shareholder. Other guru investors of Lennar include Simons’ firm, Fisher, Glenn Greenberg (Trades, Portfolio), Grantham, Dalio, Cohen, Baron and Jones.
Additional trades and portfolio performance
Other positions Muhlenkamp’s firm curbed or sold out of during the quarter included Equity Commonwealth (EQC, Financial), NMI Holdings Inc. (NMIH, Financial), Loyalty Ventures Inc. (LYLT, Financial), Invesco Buyback Achievers ETF (PKW, Financial) and the SPDR Portfolio TIPS ETF (SPIP, Financial).
Over half of the firm’s $214 million equity portfolio, which is composed of 28 stocks, is invested in the health care, energy and technology sectors.
According to GuruFocus, the Muhlenkamp Fund returned 29.02% in 2021, slightly outperforming the S&P 500’s 28.70% return.
