During the fourth quarter, most of Howard Marks (Trades, Portfolio)’ new investments at Oaktree Capital were commodity stocks, with five out of the nine purchases coming from the sector.
Marks’ latest memo titled “What Does the Market Know?” addresses whether the investor and author is worried about the current state of the market. One quote from the memo may explain Marks’ large investments in commodities.
“It seems clear to me: The market does not have above average insight, but it often is above average in emotionality. Thus we shouldn’t follow its dictates,” Marks wrote.
Marks purchased 8,801,905 shares of Gerdau, a Brazilian steelmaker, for an average of $1.46 per share. This is strikingly lower than the $11.04 average price he sold a previous holding for in the second quarter of 2011.
Gerdau’s stock has plummeted 71% over the past year as steel prices struggle worldwide due to an influx of cheap Chinese exports. The company posted its first earnings loss in the past 15 years during the third quarter, with a loss of 29 cents per share. In the prior-year quarter, Gerdau had EPS of 6 cents.
Gerdau’s operating margin has hovered around 6% from 2012 to 2014, and net income during FY 2014 was $531 million. The trailing dividend yield is 3.4%, and the payout ratio is 15%.
Southwestern Energy Co. (SWNC, Financial)
Marks bought 80,000 shares of Southwestern Energy for an average price of $25.21 per share. Southwestern is an Arkansas-based natural gas and oil exploration company whose stock has also sunk 71% over the past year.
In the third quarter, Southwestern had losses of $4.62 per share — its second consecutive quarter of being in the red. The company’s operating margin was 34% in 2014, much higher than the industry median of 4.9%.
Marks also purchased 14,200 shares of CNOOC, a Hong Kong crude oil and natural gas firm, for an average $110.56 per share. CNOOC holds interests in oil and natural gas blocks in Indonesia, the U.S., Australia and Brazil among others.
The stock is down 29% over the past year and is now trading at just 4.7x earnings. GuruFocus rates the business predictability at 4 out of 5 stars. CNOOC’s earnings have been consistently in the black, a feat for oil and gas related companies in the current environment.
The trailing 7.32% dividend yield is close to the 10-year high, and the payout ratio is 47%.
BHP Billiton PLC (BBL, Financial)
Marks bought 61,900 shares of BHP Billiton for $28.10 per share. The company explores for and develops minerals such as petroleum and potash, copper, iron ore, coal and aluminum.
BHP is down 56% in the last year and now trades at 30x earnings. In FY 2015 ended June, the company reported EPS of 72 cents, much lower than earnings of $5.18 in the prior year.
The dividend yield is close to the 10-year high at 12.23%; however, the payout ratio is at an unsustainable 190% due to the low earnings.
Another new commodity holding was 320,300 shares in Vale purchased for an average of $3.98 per share. Vale is engaged in the production and sale of iron ore, nickel, cobalt and other precious metals. The stock is down 66% in the past year.
Vale posted losses of 41 cents per share in the third quarter, compared to losses of 28 cents per share in the year-ago quarter. The operating margin declined from 32% in 2013 to 19% in FY 2014.
The company’s trailing dividend yield is more than 11%, while the payout ratio is a very high 108%.
View Howard Marks (Trades, Portfolio)’ latest stock picks here. Not a Premium Member of GuruFocus? Try it free for 7 days.
Also check out:
