During the third quarter, Spiros Segalas (Trades, Portfolio) invested in Qualcomm Inc. (QCOM, Financial), Halliburton Co. (HAL, Financial) and Adidas AG (XTER:ADS, Financial). The manager of the Harbor Capital Appreciation Fund (HACAX) also axed his positions in Abbott Laboratories (ABT, Financial) and Under Armor Inc. (UA, Financial).
As discussed in his mutual fund’s prospectus, Segalas invests in midcap to large-cap growth stocks that have high revenue and earnings growth, improving profitability and strong balance sheets. With the All-in-one Guru Screener, we can implement Segalas’s investing strategy with the following filters:
- Market cap between $5 billion and $50 billion
- Financial strength rank of at least 6 and profitability rank of at least 7
- Piotroski F-score at least 5
- 10-year revenue growth rate of at least 10% and 10-year EPS growth rate of at least 10%.
Among the stocks trading on the New York Stock Exchange and the Nasdaq, 38 made the “Segalas’s Picks, Q3” screener as of Oct. 3.
Segalas invests in technology and energy sectors
The HACAX fund manager invested 5,589,229 shares of Qualcomm and 5,071,485 shares of Halliburton. These two companies averaged $60.81 and $43.66, respectively. With these transactions, Segalas increased his portfolio by 2.21% in the aggregate.
Among these two companies, Halliburton has a poorer financial outlook: its financial strength rank and profitability rank are currently 4 and 5, respectively. The energy services company has an F-score of just 1, suggesting a poor business operation. Additionally, the company’s profit margins and returns on equity are near a 10-year low and underperform over 70% of global oil & gas equipment & services companies.
Qualcomm, on the other hand, has a financial strength rank of 7 and a profitability rank of 8. The company also has a four-star predictability rank. Despite having a modest F-score of 5, the digital communications company has a highly strong Altman Z-score and good interest coverage. Additionally, the company’s return on invested capital outperforms its WACC, suggesting that Qualcomm creates value as it grows.
Unlike Halliburton, Qualcomm has high profit margins and returns on equity. The company’s operating margin and ROE outperforms 94% and 85% of global semiconductors, respectively. Qualcomm’s three-year revenue growth rate is 12%, which ranks higher than 80% of companies in its industry.
Fund manager adds adidas, removes Under Armor
Segalas closed his position in Under Armor during the third quarter after halving his stake the quarter before. The apparel manufacturing company averaged $40.40 during the most recent quarter.
Under Armor has five net warning signs based on the formula presented in a previous article. While its Altman Z-score suggests almost no distress, the company has a weak Piotroski F-score and cash-to-debt ratio. Additionally, the company’s asset growth is faster than its revenue growth, and its Sloan ratio suggests poor earnings quality.
| Under Armor's Warning Signs | |
| Number of severe warning signs | 3 |
| Number of medium warning signs | 2 |
| Number of good signs | 3 |
| Net warning signs | 5 |
Although the company has a five-star predictability rank, the company’s profit margins and returns are near a 10-year low. This suggests that the company’s margins are declining due to loss of competitive power. Companies like Nike Inc. (NKE, Financial) and Adidas are likely taking away Under Armor’s competitive power. Segalas trimmed 26.64% of his position in the former, but invested 2,045,860 shares of the latter during the third quarter. With these two transactions, the guru increased his portfolio by a net 0.54%.
While both sports footwear companies have a financial strength rank of 7, Nike has slightly higher profitability and predictability ranks. The Oregon-based athletic company’s operating margin and ROE outperform 83% and 92% of global footwear & accessories companies respectively. Additionally, Nike’s net margin, ROE and ROA are near a 10-year high.
On the other hand, Adidas has consistent per-share revenue growth albeit contracting operating margins and weaker returns on equity. The German sporting goods company’s net margin outperforms just 59% of global footwear & accessories companies. Additionally, the company’s margins and returns generally decreased over the past 10 years.
Guru exits declining medical devices company
The fund manager axed his entire stake in Abbott, selling nearly 7.49 million shares at an average price of $42.85. Segalas knocked off 1.15% of his portfolio with this transaction.
The Illinois-based health care manufacturing company has eight net warning signs based on the following table.
| ABT's Warning Signs | |
| Number of severe warning signs | 3 |
| Number of medium warning signs | 3 |
| Number of good signs | 1 |
| Net warning signs | 8 |
Although the company has strong Altman Z-scores and returns on invested capital, the company’s profit margins have declined. Worse, the company’s three-year revenue growth, three-year EBITDA growth and ROE are near a 10-year low, the former two underperforming over 80% of global medical devices companies.
See also
With yearly rebalancing and up to 20 stocks ordered by decreasing profitability, the “Segalas’s Picks, Q3” test portfolio generated an overall return of 99% during the backtesting period from 2006-2016. This strategy outperformed the Standard & Poor’s 500 index exchange-traded fund by about 26% during the 10-year period.
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Disclosure: The author does not own shares in any of the stocks mentioned in the article.
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