Bernard Horn's 5 New Buys All Undervalued by Lynch Earnings Line

Polaris' new investments confirmed by Peter Lynch method of valuation

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May 24, 2016
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The Polaris Global Fund headed by Bernard Horn (Trades, Portfolio) picked up five new holdings during the first quarter although only one was an international company, according to data reported by GuruFocus'Ă‚ Real Time Picks.

Polaris’ investment process includes regularly screening a database of companies to narrow down undervalued stocks. Its criteria include those related to sustainable free cash flow, financial strength and liquidity. The process has largely worked well for Polaris – the fund has outperformed the MSCI World Index over each of the three-, five- and 10-year periods. Over the past three years ended the most recent quarter end, Polaris had an average annual return of 9.48% compared with 6.82% for the benchmark.

The Siam Commercial Bank PCL (BKK:SCB-F)

Polaris’ largest purchase during the quarter was 1,341,500 shares in Siam Commercial Bank, a Thai bank with subsidiaries in Cambodia and Vietnam, for an average of 127.55 baht per share. The stock has declined 21% over the past year and is undervalued when compared to the Peter Lynch earnings line.

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The bank’s current PE is 9.53, and the diluted EPS has been on an increasing trend over time, though it witnessed a dip from 15.69 baht to 13.88 baht in FY 2015. The company pays a dividend yield of 4.37% with a 46% payout ratio.

Web.com Group Inc. (WEB, Financial)

Polaris also purchased 263,200 shares of Web.com for an average price of $18.31 per share. The company provides services for small business such as website design and management, domains and search engine optimization.

The stock is down 27% over the past year and currently trades at 10x earnings. In 2015, the company pulled out of five consecutive years in the red to post $1.72 in earnings per diluted share. The operating margin is also slowly growing and was 11.36% in fiscal year 2015.

Joel Greenblatt (Trades, Portfolio) is the company's largest guru shareholder with more than 350,000 shares.

Franklin Resources Inc. (BEN, Financial)

The fund bought 127,700 shares in Franklin Resources at an average price of $35.32 per share. The financial services company is trading at 13x earnings and is undervalued according to the Peter Lynch earnings line.

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GuruFocus rates Franklin Resources’ business predictability as 4 out of 5 stars – both revenue and earnings per share have increased over time. Diluted EPS in the first quarter, however, was 61 cents, down from 98 cents in the year-ago quarter.

The dividend yield is close to the five-year high at 1.82% with a 24% payout ratio. Richard Pzena (Trades, Portfolio) is the largest guru shareholder with a 1.81% stake. David Abrams (Trades, Portfolio), Bill Nygren (Trades, Portfolio) and Mason Hawkins (Trades, Portfolio) also hold positions in Franklin Resources.

Avnet Inc. (AVT, Financial)

The fund purchased 110,500 shares in Avnet, which distributes electronic components and computer products, for an average price of $41.02 per share.

Avnet’s stock is down 12% over the past year and down 6% year to date. The Peter Lynch earnings line also indicates the company is undervalued at the current price.

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Diluted EPS in fiscal year 2015 ended June was $4.12, up from $3.89 the year before. On the balance sheet, current assets are almost double current liabilities, meaning the company can easily cover short-term obligations, while long term debt as of fiscal year 2015 was $1.6 billion.

Avnet’s dividend yield is close to the three-year high at 1.68%. The payout ratio is a low 16%, indicating the company has room to continue growing the dividend.

JPMorgan Chase & Co. (JPM, Financial)

Polaris’ fifth new stock buy during the quarter was 82,500 shares in JPMorgan for an average price of $58.48 per share. The bank currently trades at 11x earnings, and the Peter Lynch earnings line points to a fair value of $88.30, while the stock trades at $64.39 as of Tuesday afternoon.

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Diluted EPS has increased over time and was $6 in 2015. The operating margin for that year was almost 33%.

The bank’s dividend yield is near the three-year high at 2.79%. Notable guru shareholders include Chris Davis (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).

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