Bill Nygren (Trades, Portfolio) Buys American Airlines, CVS, Priceline
Bill Nygren (Trades, Portfolio) has not revealed his fourth-quarter portfolio update yet, but he disclosed some of his new positions in an investor letter this week. As new fourth-quarter buys, he chose: American Airlines Group Inc., CVS Health Corp. and Priceline Group Inc.
Despite the market’s determined march, the value investor continued to find attractively valued investment opportunities, he said.
Recently, Nygren’s $18 billion Oakmark Fund has nearly kept pace with the ebullient S&P 500 index. The fund generated a 6.1% return versus a 6.6% rise in the index in the fourth quarter. For the year, Nygren returned 21.1%, just shy of the 21.8% return in the index.
Nygren’s portfolio has a relatively low price-earnings ratio at 15.6, compared to 26.8 for the S&P 500, and seeks only stocks below his estimate of intrinsic value. As top holdings, the long-term investor has built positions in Citigroup (C, Financial), Alphabet (GOOGL, Financial) and American International Group (AIG, Financial).
New Buys
American Airlines (AAL, Financial)
Nygren purchased American Airlines Group for $53 per share; the stock traded Friday for around $58.34.
Nygren commented in his investor letter:
Although the airlines have always provided a useful consumer service, we feel they have historically been unattractive long-term investment candidates. In the past, the major U.S. airlines lacked pricing power and faced problems related to poor corporate cultures. However, after years of consolidation capped by the merger of US Airways and American Airlines in 2013, the industry has become more mature and disciplined. The three major hub-and-spoke carriers each have strengths in their respective hubs, and their management teams are making wiser decisions about capacity additions and capital allocation. American Airlines’ CEO Doug Parker sees substantial opportunity to grow value as the company completes the US Airways merger integration. He is improving the company’s culture and restoring credibility with employees. Parker believes that American Airlines has around $5 billion of pretax earnings power, which is up 50% from our 2017 estimate, and he has bought back 37% of the company’s shares since the merger closed. With the stock selling for a single-digit multiple of normal earnings power, we believe American Airlines is an attractive investment.
CVS Health Corp. (CVS, Financial)
Nygren purchased CVS Health Corp. for $73 per share; the stock traded Friday for around $78.80.
Nygren commented:
CVS is well positioned in a U.S. health care system that rewards scale, as the company owns the nation’s largest pharmacy benefit manager (PBM), the largest retail pharmacy and the largest retail clinic. Both the PBM and retail pharmacy segments are as concentrated as they have ever been, and we believe these lines of business protect existing players and pose serious challenges for new entrants. After underperforming the S&P 500 by nearly 60% over the past two years, CVS is now valued at less than 12x next year’s consensus earnings after adding back amortization of intangible assets. In our view, the market is underestimating the durability of the company’s competitive advantages across multiple end markets. Additionally, the pending acquisition of Aetna, Inc. would bring together two forward-thinking management teams and give them a broad suite of assets through which to address sector-wide trends, like the shift toward value-based care models and the increasing “consumerization” of health care.
Priceline Group Inc. (PCLN, Financial)
Nygren purchased Priceline Group for around $1,760 per share; the shares traded Friday afternoon for around $1,919.
During the quarter, we established a position in Priceline, a pioneer and global leader in the online travel industry. We believe Priceline’s valuation is attractive when viewed against our long-term growth expectations, as we expect online bookings to continue capturing share from offline sources for years to come. The company is investing heavily in business travel, mobile, alternative accommodations and other ancillary businesses, which we believe will further solidify its competitive position and support attractive long-term growth. Priceline’s strong brands, significant investment expenditure and scale advantages should further enhance the company’s powerful network effect. In addition, its geographic exposure, revenue mix and superior online traffic conversion make it one of the best operating models in the industry. On our one-year forward estimate, Priceline trades in line with the S&P 500 P/E ratio (excluding its net cash and investments), despite having a superior growth outlook, an above-average margin profile and extremely high returns on incremental capital, allowing us to buy an above-average business at just an average price.
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