Renowned investor Charlie Munger (Trades, Portfolio), the chairman of Daily Journal Corp. (DJCO, Financial), disclosed his California-based publishing company’s second-quarter equity portfolio earlier this month.
Also the vice chairman of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), Munger is known for using his dry wit and keen mind when helping Warren Buffett (Trades, Portfolio) make investing decisions. He has developed a series of mental models that are framed as a latticework to help solve critical business problems.
While Munger’s Daily Journal has positions in five stocks, 13F filings show it did not make any significant changes to the holdings during the three months ended June 30.
Regardless, many investors are likely looking for opportunities to take advantage of in the current market environment. As a result, they may be interested in some of the stocks in the guru’s $175 million equity portfolio that are undervalued centered on an earnings-based discounted cash flow model.
According to GuruFocus portfolio data, current positions in Munger’s portfolio that have a margin of safety and high predictability are Wells Fargo & Co. (WFC, Financial), U.S. Bancorp (USB, Financial) and Alibaba Group Holdings Ltd. (BABA, Financial).
Investors should be aware the 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.
Wells Fargo
Shares of Wells Fargo (WFC, Financial) are trading at a 22.51% discount to their fair value of $56.51 according to the earnings-based DCF model.
The San Francisco-based bank has a $165.26 billion market cap; its shares were trading around $43.72 on Monday with a price-earnings ratio of 10.44, a price-book ratio of 1.04 and a price-sales ratio of 2.32.
The GF Value Line suggests the stock is fairly valued currently based on historical ratios, past financial performance and future earnings projections.
The GF Score of 76 out of 100 indicates Wells Fargo will likely have average performance going forward. The company received high points for momentum, GF Value, profitability and growth, but a low grade for financial strength.
GuruFocus rated Wells Fargo’s financial strength 3 out of 10 as it is being weighed down by weak debt-related ratios.
The company’s profitability fared better with a 6 out of 10 rating despite having margins and returns on equity, assets and capital that are underperforming at least half of its competitors. Regardless, Wells Fargo has a moderate Piotroski F-Score of 6 out of 9, indicating operating conditions are typical of a stable company. Consistent earnings and revenue growth also contributed to its 4.5-star predictability rank. According to GuruFocus research, companies with this rank return an average of 10.6% annually over a 10-year period.
As of the end of the second quarter, Munger held 1.59 million shares of Wells Fargo, which accounted for 35.64% of the equity portfolio and his second-largest holding. GuruFocus estimates he has gained 1.01% on the investment, which was established in the fourth quarter of 2013.
Other top guru shareholders include Dodge & Cox, PRIMECAP Management (Trades, Portfolio), Chris Davis (Trades, Portfolio), Hotchkis & Wiley, Richard Pzena (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss and the T Rowe Price Equity Income Fund (Trades, Portfolio).
U.S. Bancorp
U.S. Bancorp’s (USB, Financial) stock is trading at a 19.12% discount to its DCF fair value of $59.75.
The bank holding company, which is headquartered in Minneapolis, has a market cap of $71.76 billion; its shares were trading around $48.36 on Monday with a price-earnings ratio of 11.10, a price-book ratio of 1.73 and a price-sales ratio of 3.10.
According to the GF Value Line, the stock is modestly undervalued currently.
The GF Score of 83 out of 100 indicates the company has good outperformance potential, receiving high marks for profitability, growth, GF Value and momentum. Financial strength, however, was low.
Weighed down by debt-related ratios that are underperforming in comparison to over half of its industry, U.S. Bancorp’s financial strength was rated 3 out of 10 by GuruFocus.
The company’s profitability fared better, scoring a 7 out of 10 rating. U.S. Bancorp is supported by margins and returns that top over half of its industry peers as well as a high Piotroski F-Score of 7, which indicates conditions are healthy. Steady earnings and revenue growth also contributed to a five-star predictability rank. GuruFocus data shows companies with this rank return, on average, 12.1% annually.
As of the end of the second quarter, Munger held 140,000 shares, representing his fourth-largest holding with a weight of 3.68%. He has gained an estimated 25.88% on the investment so far.
Of the other gurus invested in the stock, Buffett is the largest shareholder with an 8.51% stake. Davis, Jeremy Grantham (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Mairs & Power and Yacktman Asset Management (Trades, Portfolio), along with many others, also have notable holdings.
Alibaba
Generating a DCF fair value of $117.30, shares of Alibaba (BABA, Financial) are trading with a 15.19% margin of safety.
The Chinese e-commerce giant has a $268.60 billion market cap; its shares were trading around $100.41 on Monday with a price-earnings ratio of 32.54, a price-book ratio of 1.80 and a price-sales ratio of 2.05.
Based on the GF Value Line, the stock appears to be significantly undervalued currently.
The GF Score of 78 out of 100 implies the company is likely to generate an average performance going forward. It received high marks for profitability, growth and financial strength, but low points for GF Value and momentum.
GuruFocus rated Alibaba’s financial strength 7 out of 10 despite having inadequate interest coverage. The high Altman Z-Score of 3.03 indicates the company is in good standing. The weighted average cost of capital eclipses the return on invested capital, however, meaning the company is struggling to create value as it grows.
The company’s profitability scored a 9 out of 10 rating. Along with operating and gross margins that are in decline, Alibaba’s returns are underperforming over half of its competitors. It also has a moderate Piotroski F-Score of 5. Despite recording consistent earnings and revenue growth, the three-star predictability rank is on watch. GuruFocus found companies with this rank return an average of 8.2% annually.
Munger held 300,000 shares of Alibaba at the end of the second quarter. With a weight of 19.50%, it is his third-largest holding. GuruFocus estimates he has lost 40.70% on the investment so far.
With a 1.65% stake, David Herro (Trades, Portfolio) is Alibaba’s largest guru shareholder. Other top guru investors include PRIMECAP, Ken Fisher (Trades, Portfolio), Dodge & Cox, Ray Dalio (Trades, Portfolio), First Eagle, Al Gore (Trades, Portfolio)’s Generation Investment and Davis.
