First Pacific Advisors Picks Up Bargains With CarMax, Ferguson

First Pacific Advisors (Trades, Portfolio) recently disclosed its 13F portfolio updates for the second quarter of 2022, which ended on June 30.

The Los Angeles-based investment management firm emphasizes a research-based, low-risk value investing strategy that seeks to increase capital in the long term while avoiding a high chance of loss. First Pacific invests through several funds, including the FPA Capital Fund (Trades, Portfolio), the FPA Crescent Fund, the FPA International Value Fund and the FPA Paramount Fund.

Based on its latest 13F filing, the firm’s top five trades for the quarter included new positions in CarMax Inc. (KMX, Financial) and Ferguson PLC (FERG, Financial), an addition to Amazon.com Inc. (AMZN, Financial) and reductions to American International Group Inc. (AIG, Financial) and FirstEnergy Corp. (FE, Financial).

Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.

CarMax

The firm acquired a 1,441,894-share stake in CarMax (KMX, Financial), giving it a weight of 1.95% in the equity portfolio. During the quarter, shares averaged $94.08 apiece.

The American used car retailer has failed to impress investors recently because, despite an incredibly strong used car market, it has failed to grow its margins. Thus, despite showing strong growth in its top and bottom lines, the market has given the stock a price-earnings ratio of just 17.25 as of this writing.

CarMax was prioritizing market share gains over profitability increases during favorable market conditions, which could be better for the company in the long run. With the economy slowing down, though, the company is being "adversely affected by macro factors," said CEO Bill Nash in February, which is likely contributing to the stock’s price drop.

Ferguson

The firm also established a position worth 752,795 shares in Ferguson (FERG, Financial), giving the stock a weight of 1.25% in the equity portfolio at the quarter’s average share price of $121.31.

Ferguson is a British-American value-added distributor of products for a variety of industries, including infrastructure, plumbing, appliances, HVAC, fire, fabrication and more. More than half of its revenue comes from product distributions for residential end markets, so its business has been getting a boost in elevated housing starts.

On top of the generally good business conditions, Ferguson has shown its strength by improving its margins and growing its market share in recent quarters. Its operating margin of 10.17% is higher than 74% of industrial distribution companies

Amazon.com

The firm increased its investment in Amazon.com Inc. (AMZN, Financial) by 35.63% for a total of 2,282,100 shares, adding 0.95% to the equity portfolio. Shares traded for an average price of $125.73 during the quarter.

E-commerce and cloud computing giant Amazon has seen its valuation take a hit as inflation has weighed heavily on the low-margin e-commerce business. Some are also worried growth in the cloud computing segment could be adversely impacted by economic issues, with companies potentially cutting back on spending for technological improvements.

With a price-earnings ratio of 126.03, Amazon doesn’t qualify as “cheap” based on the traditional definition, but the GF Value chart rates it as modestly undervalued based on historical valuation ratios, past returns and analysts’ estimates of future business performance. Moreover, Amazon’s established market dominance in both of its main operating areas should help it keep its moat intact.

American International Group

The firm reduced its American International Group (AIG, Financial) holding by 10% for a remaining stake of 6,685,302 shares. The trade shaved 0.60% off the equity portfolio. During the quarter, shares changed hands for an average price of $58.16.

At a price-earnings ratio of just 4.87, American International Group is priced cheap even compared to the other stocks in the typically low-valued insurance industry. However, the forward price-earnings ratio is 10.63 as analysts expect near-term earnings struggles. That is no surprise given the insurance industry is among those struggling the most with inflation.

Even in this difficult environment, American International Group is seeing increased inflows and improved underwriting results. Investors could also benefit from its planned initial public offering of the Corebridge Financial segment, though this offering has been delayed to “solidify the capital structure” for the business to operate as a standalone.

FirstEnergy

The firm also sold 17.97% of its FirstEnergy (FE, Financial) holding for a remaining stake of 3,603,491 shares. The trade slimmed the equity portfolio by 0.47% at the quarter’s average share price of $42.74.

As an electric utility company, FirstEnergy’s growth prospects are limited, but it does offer a solid dividend yield of 3.89%, and utilities have historically been considered good stocks to hold during inflationary periods due to the reliability of their earnings.

On the other hand, FirstEnergy’s balance sheet is weak even for a utility company, with an interest coverage ratio of 2.1, a current ratio of 0.75 and an Altman Z-Score of 0.8. Not even raising cash by issuing new shares has made a dent in this problem.

Portfolio overview

As of the quarter’s end, the firm held 185 common stock positions valued at a total of $6.69 billion. Turnover for the quarter was 7%.

Its top holdings were Comcast Corp. (CMCSA) with 6.61% of the equity portfolio, Alphabet Inc. (GOOG) with 6.05% and Analog Devices Inc. (ADI) with 5.11%.

In terms of sector weighting, the firm was most invested in communication services, financial services and technology.