Bruce Berkowitz (Trades, Portfolio), leader of Fairholme Capital Management, applies Benjamin Graham’s strategy when selecting stocks, seeking companies that have solid management, generate high free cash flows and are trading at a deep discount to intrinsic value.
Believing that a more diversified portfolio leads to a more average performance, the guru’s Miami-based firm concentrates its investments in a relatively small number of companies.
In the current environment of high inflation, rising interest rates and geopolitical uncertainty, many investors are likely looking for opportunities to take advantage of. As a result, they may be interested in some of the stocks in the guru’s $1.21 billion equity portfolio that are undervalued according to an earnings-based discounted cash flow model.
GuruFocus portfolio data, which is based on 13F filings as of June 30, shows current positions in Berkowtiz’s equity portfolio that have a margin of safety and high predictability are D.R. Horton Inc. (DHI, Financial), West Fraser Timber Co. Ltd. (WFG, Financial) and Intel Corp. (INTC, 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.
D.R. Horton
Shares of D.R. Horton (DHI, Financial) are trading at an 86.77% discount to their fair value of $537.76 according to the earnings-based DCF model.
The Arlington, Texas-based homebuilder has a $24.54 billion market cap; its shares were trading around $70.78 on Thursday with a price-earnings ratio of 4.53, a price-book ratio of 1.35 and a price-sales ratio of 0.79.
The GF Value Line suggests the stock, while undervalued, is a possible value trap currently based on historical ratios, past performance and future earnings projections. As such, potential investors should do thorough research before making a decision.
The GF Score of 98 out of 100 indicates the company has high outperformance potential. It received high marks across the board.
GuruFocus rated D.R. Horton’s financial strength 6 out of 10. Although the company has issued new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The robust Altman Z-Score of 5.24 also indicates it is in good standing. The return on invested capital overshadows the weighted average cost of capital, meaning value is being created as the company grows.
The company’s profitability scored a 10 out of 10 rating, boosted by operating margin expansion, returns on equity, assets and capital that outperform a majority of competitors and a moderate Piotroski F-Score of 6 out of 9, which implies conditions are typical for a stable company. Consistent earnings and revenue growth contributed to a predictability rank of four out of five stars. According to GuruFocus research, companies with this rank return an average of 9.8% annually over a 10-year period.
Of the gurus invested in D.R. Horton, George Soros (Trades, Portfolio) has the largest stake with 0.86% of its outstanding shares. The Smead Value Fund (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Glenn Greenberg (Trades, Portfolio) and the Parnassus Endeavor Fund (Trades, Portfolio) also have significant positions in the stock.
West Fraser Timber
West Fraser Timber’s (WFG, Financial) stock is trading at a 76.21% discount to its DCF fair value of $315.62.
The Canadian forestry company, which produces lumber, plywood, pulp, newsprint, wood chips and other products, has a market cap of $6.59 billion; its shares were trading around $75.18 on Thursday with a price-earnings ratio of 3.16, a price-book ratio of 0.89 and a price-sales ratio of 0.81.
According to the GF Value Line, the stock is modestly undervalued currently.
Further, the GF Score of 96 suggests the company has high outperformance potential, raking in high ranks all around.
West Fraser Timber’s financial strength and profitability were both rated 9 out of 10 by GuruFocus. In addition to a comfortable level of interest coverage, the high Altman Z-Score of 4.95 indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. Value creation is also occurring since the ROIC eclipses the WACC.
The company is being supported by strong margins and returns that outperform a majority of industry peers as well as a moderate Piotroski F-Score of 6. Despite recording steady earnings and revenue growth, West Fraser Timber’s four-star predictability rank is on watch.
With 0.62% of its outstanding shares, Murray Stahl (Trades, Portfolio) has the largest position in West Fraser Timber. Other guru shareholders are Jeremy Grantham (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Joel Greenblatt (Trades, Portfolio) and Scott Black (Trades, Portfolio).
Intel
Generating a DCF fair value of $83.12, shares of Intel (INTC, Financial) are trading with a 66.15% margin of safety.
The semiconductor chip manufacturer, which is headquartered in Santa Clara, California, has a $114.40 billion market cap; its shares were trading around $28.10 on Thursday with a price-earnings ratio of 5.96, a price-book ratio of 1.14 and a price-sales ratio of 1.56.
Based on the GF Value Line, the stock appears to be significantly undervalued currently.
The GF Score of 85 implies the company is expected to have good outperformance potential, having gotten high marks for everything except its momentum rank.
GuruFocus rated Intel’s financial strength 7 out of 10 as it is being supported by a comfortable level of interest coverage. The Altman Z-Score of 2.62, however, cautions it is under some pressure. The ROIC also exceeds the WACC, so value is being created.
The company’s profitability scored a 9 out of 10 rating as a result of operating margin expansion, strong returns that are outperforming versus competitors and a moderate Piotroski F-Score of 5. Intel’s two-star predictability rank is on watch as a result of a decline in revenue per share growth over the past year. GuruFocus found companies with this rank return, on average, 6% annually.
PRIMECAP Management (Trades, Portfolio) is the company’s largest guru shareholder with a 1.18% stake. Chris Davis (Trades, Portfolio), Al Gore (Trades, Portfolio), Seth Klarman (Trades, Portfolio), the Parnassus Endeavor Fund (Trades, Portfolio), Michael Price (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Grantham, Ray Dalio (Trades, Portfolio) and Tweedy Browne (Trades, Portfolio) also have notable holdings in Intel.
