John Rogers (Trades, Portfolio), leader of Ariel Investments, disclosed his firm’s fourth-quarter portfolio earlier this month.
The guru’s Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Like the tortoise featured in the firm’s logo, Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.
In its fourth-quarter letter, the Ariel Fund noted that due to high inflation, increasing geopolitical tensions, energy price shocks, supply bottlenecks and the Federal Reserve’s tightening, it deemed “a mild recession in the U.S. to be more likely than a Fed-induced hard landing.”
It continued:
“Against this noisy backdrop, we believe active stock pickers steeped in fundamentals are being presented an opportunity to purchase downtrodden shares of quality companies whose value should be realized over the long term.”
Keeping these developments in mind, 13F filings show the firm entered four positions during the three months ended Dec. 31, sold out of two stocks and added to or trimmed a slew of other existing investments. The most notable trades included a new stake in The Carlyle Group Inc. (CG, Financial), increased bets on Generac Holdings Inc. (GNRC, Financial) and Verizon Communications Inc. (VZ, Financial) and reductions in the KKR & Co. Inc. (KKR, Financial) and Gilead Sciences Inc. (GILD, Financial) holdings.
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.
Carlyle Group
The firm invested in 2.93 million shares of Carlyle Group (CG, Financial), allocating 0.89%of the equity portfolio to the stake. The stock traded for an average price of $28.54 per share during the quarter.
The Washington D.C.-based private equity company, which also provides alternative asset management and other financial services, has a $12.50 billion market cap; its shares were trading around $34.31 on Wednesday with a price-earnings ratio of 10.21, a price-book ratio of 2 and a price-sales ratio of 3.83.
The GF Value Line suggests the stock is modestly overvalued currently based on historical ratios, past performance and analysts’ future earnings projections.
At 58 out of 100, the GF Score indicates the company has poor future performance potential on the back of a high momentum rank, middling marks for profitability and low ratings for growth, financial strength and GF Value.
In its commentary for the quarter, the firm noted it believes the company has “a highly scalable business with attractive fundamentals and healthy fundraising momentum.”
Of the gurus invested in Carlyle Group, Rogers’ firm has the largest stake with 0.80% of its outstanding shares. Ron Baron (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) also have significant positions in the stock.
Generac
Ariel upped its Generac (GNRC, Financial) stake by 248.16%, buying 935,076 shares. The transaction impacted the equity portfolio by 0.96%. Shares traded for an average price of $113.16 each during the quarter.
The firm now holds 1.31 million shares in total, occupying 1.34% of the equity portfolio. GuruFocus estimates it has gained 6.77% on the investment so far.
The manufacturer of power generation equipment, which is headquartered in Waukesha, Wisconsin, has a market cap of $7.30 billion; its shares were trading around $118.80 on Wednesday with a price-earnings ratio of 21.28, a price-book ratio of 3.15 and a price-sales ratio of 1.63.
According to the GF Value Line, the stock is significantly undervalued currently.
The GF Score of 84 suggests the company has good outperformance potential. While Generac received high ratings for profitability and growth, the financial strength and GF Value ranks were more moderate and momentum was low.
The firm noted in the commentary that Generac has an “unmatched distribution network and product portfolio enjoys strong brand advantages, creating a wide moat for this niche business which commands a 75% market share in the North American residential market.”
With 2.07% of its outstanding shares, Rogers has the largest position in Generac. Other top guru investors include Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Philippe Laffont (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Robert Olstein (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Verizon Communications
The firm boosted its Verizon Communications (VZ, Financial) stake by 75.33%, buying 1.45 million shares. The transaction had an impact of 0.58% on the equity portfolio. During the quarter, the stock traded for an average per-share price of $37.68.
Ariel now holds a total of 3.38 million shares, accounting for 1.38% of the equity portfolio. GuruFocus data shows the firm has lost an estimated 3.01% on the long-held investment.
The New York-based telecom company has a $165.39 billion market cap; its shares were trading around $39.38 on Wednesday with a price-earnings ratio of 7.78, a price-book ratio of 1.81 and a price-sales ratio of 1.21.
Based on the GF Value Line, the stock appears to be modestly undervalued currently.
Further, the GF Score of 72 implies the company is likely to have average performance going forward, driven by high ratings for profitability and GF Value, moderate marks for growth and financial strength and a low momentum rank.
Diamond Hill Capital (Trades, Portfolio) is Verizon’s largest guru shareholder with a 0.16% stake. The Parnassus Endeavor Fund, the T Rowe Price Equity Income Fund (Trades, Portfolio), Simons’ firm and Jeremy Grantham (Trades, Portfolio) also have notable holdings.
KKR
Impacting the equity portfolio by -1.15%, Rogers’ firm slashed its KKR (KKR, Financial) position by 71.24%, selling 2.43 million shares. The stock traded for an average price of $48.74 per share during the quarter.
The firm now holds 981,829 shares, which make up 0.46% of the equity portfolio. GuruFocus found Ariel has gained around 98.40% on the investment over its lifetime.
The alternative asset manager headquartered in New York has a market cap of $48.03 billion; its shares were trading around $55.78 on Wednesday with a price-book ratio of 2.94 and a price-sales ratio of 5.24.
The GF Value Line suggests the stock is significantly overvalued currently.
The company is likely to have average performance going forward based on its GF Score of 77. Although it raked in high ratings for three of the criteria, the financial strength and GF Value ranks were low.
Holding a 2.75% stake, ValueAct Capital (Trades, Portfolio) is KKR’s largest guru shareholder. Chuck Akre (Trades, Portfolio), Diamond Hill, Bill Nygren (Trades, Portfolio), the late Spiros Segalas’ Harbor Capital Appreciation Fund (Trades, Portfolio) and Gayner also have large holdings.
Gilead Sciences
With an impact of -1.01% on the equity portfolio, Ariel curbed its Gilead Sciences (GILD, Financial) holding by 55.92%, dumping 1.49 million shares. During the quarter, shares traded for an average price of $79.19 each.
The firm now holds, in total, 1.17 million shares, giving it 1.03% space in the equity portfolio. GuruFocus says it has gained approximately 2.72% on the investment to date.
The Foster City, California-based biopharmaceutical company, which develops antiviral drugs to treat HIV, AIDS, hepatitis B and C, influenza and Covid-19, has a $103.69 billion market cap; its shares were trading around $83.16 on Wednesday with a price-earnings ratio of 22.78, a price-book ratio of 4.92 and a price-sales ratio of 3.83.
According to the GF Value Line, the stock is modestly overvalued currently.
Further, the GF Score of 74 means the company is likely to have average performance going forward. While it received high profitability and financial strength ranks, the growth rating was more moderate and the GF Value and momentum were low.
Gilead’s largest guru shareholder is Dodge & Cox with a 2.88% stake. Other top guru investors include Simons’ firm and the Parnassus Endeavor Fund.
Portfolio composition and performance
During the quarter, the Ariel Fund also entered positions in Leslies Inc. (LESL, Financial), Itau Unibanco Holding SA (ITUB, Financial) and the iShares Russell Mid-Cap Value ETF (IWS, Financial) as well as divested of the Omnicom Group Inc. (OMC, Financial) and Houlihan Lokey Inc. (HLI, Financial) holdings.
The fund's $9.85 billion equity portfolio, which is composed of 116 stocks, is largely invested in the financial services, communication services, industrials and consumer cyclical sectors.
The Ariel Fund posted a return of -18.82% for fiscal 2022, slightly underperforming both the Russell 2500 Index’s -18.37% return and the S&P 500's -18.11% return.
