In a disappointing year for stock markets around the world, few hedge funds can say they are doing well. Yet Bridgewater Associates, the investment firm founded by Ray Dalio (Trades, Portfolio) in 1975, saw its flagship Pure Alpha II macro fund advance 4.8% in June, bringing its return for the first half of 2022 to 32%. This marks a promising rebound in the firm’s macro strategy after it underperformed in 2020.
Bridgewater takes a principled approach to investing, applying standardized methods to deal with recognizable market patterns. Dalio’s investment innovations such as risk parity, alpha overlay and “All Weather” are recognized as having changed the way global institutions approach investing.
As a global macro investment manager, the firm diversifies itself with investments in 150 different markets. Its management strategy is based on creating an “idea meritocracy” where fund managers employ radical truth and radical transparency, encouraging open and honest dialogue and allowing the best thinking to prevail.
With the data we have available as of Bridgewater’s latest 13F report for the second quarter of 2022 and the most recent company earnings results, the GuruFocus All-in-One Screener, a Premium feature, shows that three of Bridgewater’s holdings meet strict value and growth criteria: Lithia Motors Inc. (LAD, Financial), Lam Research Corp. (LRCX, Financial) and Applied Materials Inc. (AMAT, Financial). The criteria used for this screen included trading below GF Value, trading below discounted cash flow value and having three-year annualized growth rates of at least 15% for revenue and 25% for earnings per share.
Lithia Motors
Lithia Motors (LAD, Financial) is an American automotive retailer based in Medford, Oregon. Though it was founded in 1946, it did not really become a growth stock until recent years when it began executing an aggressive dealership acquisition strategy in a bid to become the nation’s top auto dealer.
On Oct. 5, shares of Lithia Motors traded around $213.29 apiece for a market cap of $5.87 billion and a price-earnings ratio of 4.97. The stock trades at an 85.44% discount to fair value based on the discounted cash flow calculator, assuming a growth rate of 20% (the past 10-year earnings per share growth rate is 27.60%) and a discount rate of 10%. The GF Value chart rates the stock as significantly undervalued.
Over the past three years, Lithia Motors has grown its revenue per share at an annual rate of 17.7% and its earnings per share without non-recurring items at an annual rate of 49.8%. Ebitda has grown 25.80% per year over the past decade.
Going forward, Lithia Motors plans to continue its aggressive growth strategy, driven by acquisitions and connected e-commerce offerings, as it aims to consolidate the more fragmented parts of the U.S. automobile retail industry. Even if the U.S. economy enters a recession, the short-term hit to Lithia Motors’ business could be mitigated by the ability to make important acquisitions at discount prices.
Lam Research
Lam Research (LRCX, Financial) is a semiconductor company based in Fremont, California. It primarily engages in designing, manufacturing, marketing and servicing semiconductor processing equipment that is used in the fabrication of advanced integrated circuits.
On Wednesday, shares of Lam Research traded around $399.91 apiece for a market cap of $54.72 billion and a price-earnings ratio of 12.21. The stock trades at a 64.51% discount to fair value based on the discounted cash flow calculator, assuming a growth rate of 20% (the past 10-year earnings per share growth rate is 42%) and a discount rate of 10%. The GF Value chart rates the stock as a potential value trap because it is trading so far below its GF Value.
Lam Research has achieved a three-year revenue per share growth rate of 26.6% and a three-year earnings per share without non-recurring items growth rate of 33.7%. Over the longer term, the company has a 10-year Ebitda growth rate of 32%.
Some investors may be concerned that a semiconductor glut will follow the shortage, spelling trouble for companies in the industry. However, Lam Research is a pick-and-shovel play for the semiconductor industry, so its profits are tied more to industry growth rather than industry profitability. Companies and the government are ramping up their spending on domestic semiconductor production in the U.S., which will be a powerful tailwind for some time yet.
Applied Materials
Applied Materials (AMAT, Financial) is a leading global materials engineering company headquartered in Santa Clara, California. It provides equipment, services and software that are used in the manufacture of semiconductor chips for electronics, flat panel displays, smartphones and solar products, among others.
Shares of Applied Materials changed hands for around $89.22 apiece on Oct. 5 for a market cap of $76.76 billion and a price-earnings ratio of 11.91. The discounted cash flow model gives the stock a 65.34% margin of safety based on an assumed 20% growth rate (the past 10-year earnings per share growth rate is 36.10%) and a discount rate of 10%. The GF Value chart rates the stock as modestly undervalued.
Over the past three years, the company has grown its revenue per share 15.5% annually and its earnings per share without non-recurring items by 29.3% annually. The 10-year Ebitda growth rate stands at 24.10%.
Applied Materials does not sell the exact same products as Lam Research, but the two do have a lot of overlap in the deposition and etching equipment markets, and they benefit from the same industry tailwinds. Applied Materials does have a slight economic advantage because while Lam Research is mostly exposed to NVM and DRAM memory markets, Applied Materials’ business is more evenly distributed across the memory, foundry and logic markets.
