Joel Greenblatt (Trades, Portfolio), the guru known for binging on stocks that are cheap and good, has revealed what’s new in his portfolio for the last months of the year.
The guru’s Gotham Asset Management now holds 919 stocks in all, of which 246 are new picks as of the fourth quarter. The holdings have a value of $6.9 billion dollars and are weighted in consumer cyclical (22.6%), technology (21.9%), industrials (17.8%), health care (14.4%), consumer defensive (10.1%), basic materials (4.9%), energy (2.9%), communication services (2.5%) and financial services (1.8%).
The portfolio has a turnover rate of 32% from the previous quarter, which is typical of Greenblatt, who assesses stocks based on what he calls the “Magic Formula.” He tears up company balance sheets and income statements to unearth businesses that show large yields on earnings and that deploy invested capital in an efficient manner. He typically sells out after a year.
In 2016, his portfolio posted a return of 7.96%. The S&P 500's performance was 11.96% that year.
Top buys/sales in the fourth quarter
His three largest stock buys of the fourth quarter are Eaton Corp. (ETN, Financial), Tyson Foods Inc. (TSN, Financial) and Rockwell Collins (COL, Financial).
Meanwhile, his three top sales of the quarter are: International Business Machines Corp. (IBM, Financial), HCA Healthcare Inc. (HCA, Financial) and United Parcel Service (UPS, Financial).
A number of gurus sold or reduced a position in IBM during the final months of the year. They were Tweedy Browne (Trades, Portfolio), Dodge & Cox and Jeremy Grantham (Trades, Portfolio).
Warren Buffett (Trades, Portfolio) steadily reduced his holdings over the last year. In early 2017, Buffett held 64 million shares. After the fourth quarter, he had 2 million shares. Buffett had a loss of 14% since he began buying shares in 2012.
The magic formula
Some critics of Greenblatt’s strategy say it is limited because it doesn’t account for growth since it only tracks business operations for a year. This may put investors at a disadvantage as they would miss out on some opportunities in companies showing promising growth over long periods of time.
Greenblatt’s top picks
Cleveland-based Eaton is a power management company that serves industrial customers, including electrical transmission systems, lighting, hydraulics, aerospace fuel systems and truck and auto power train systems. Products include UPS systems, hydraulic pumps, cylinders, clutches and circuit breakers.
The stock market was closed for the President’s Day holiday.
But the latest trading results showed it was worth just under $83 a share, up .04%. The company’s stock price has risen 16% in the last 12 months.
Greenblatt bought more than 584,000 shares of the company at a price of $77.74 a share. The shares sit in 0.67% of the portfolio.
Greenblatt’s metrics are emphasized in the stock. Its return on investment (ROE) is 18.75%, or 84% higher than the median of 7.67%. Its return on capital (ROC) is 59.47%, or higher than 91% of its peers. The median is 12.78%.
The company has a market cap of $36 billion.
GuruFocus ranks its financial strength a 6 out of 10 and its profitability and growth 5 of 10.
The stock has one severe warning sign, according to GuruFocus. Its revenue per share has been in decline for the last five years.
The company, however, has a number of good signs, including a price-earnings ratio (P/E) close to a five-year low and a price-book ratio (P/B) close to a one-year low. It also has a high Piotroski-F score of 7, indicating a healthy situation.
Tyson Foods processes and distributes raw and value-added beef, chicken, pork and prepared foods.
Tyson was at $76 a share, up 0.17%. The Arkansas-based company's stock has jumped by 16% in the last year.
Greenblatt last sold out of the stock in the third quarter. He has been buying and selling Tyson shares since 2012.
In the fourth quarter, he purchased 550,000 shares for an average price of $76.42 a share. The shares fill up 0.65% portfolio space.
The company’s ROE is 26.31% versus the industry median of 8.34%. And its return on capital is 36.32% versus the industry median of 12.77%.
GuruFocus did not detect any severe warning signs for the company. It got high marks for consistent growth in revenue per share and expanding operating margins.
The company has a market cap of $28 billion.
Its financial strength is 6 of 10 and its profitability and growth is 7 of 10.
Rockwell Collins, an aviation electronics developer with commercial and military customers worldwide, drew a number of investors in the last quarter of the year.
New buyers included John Paulson (Trades, Portfolio), George Soros (Trades, Portfolio), Leucadia National (Trades, Portfolio) and Greenblatt, who bought 310,600 shares for $134 a share. It takes up 0.61% portfolio space.
The stock was worth $135.92, or down 0.16%, on Monday. Its stock has risen by 45% over the last 12 months.
The $22 billion market cap company has a GuruFocus ranking of 5 out of 10 in financial strength and an 8 out of 10 in profitability and growth.
Its ROE is 18.59%, which is higher than the median of 7.39%.
And its ROC is 39.69%, also higher than the median of 9.85%.
The company has seen consistent growth in revenue per share. However, GuruFocus has identified a few red flags: assets are growing at a faster rate than revenue growth and operating margins have been declining over the past five years.
