David Herro Bets on Underperforming Real Estate Data Provider

GE losses didn't stop returns from beating the index

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Yamil Berard
Feb 27, 2018
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David Herro (Trades,Portfolio) established two positions in his Oakmark Global all-cap portfolio of U.S. and international securities.

The Chicago-based investment manager beat the international index easily in 2017 as long-term investments in Germany and the United Kingdom have come to fruition.

Herro ended the year with a 27.1% rate of return while the MSCI World Index returned 22.4% for the year.

Since its launch in August 1999, Oakmark Global has returned 10.8% versus 4.9% for the MSCI World Index and 5.7% for the Lipper Global Fund Index.

The biggest gains came from stocks in Germany, the United Kingdom and the U.S., like Bank of America (

BAC, Financial) and TE Connectivity (TEL, Financial).

Its clunkers included Grupo Televisa (

TV, Financial), Carmax (KMX, Financial) and General Electric Co. (GE, Financial), which was trading at under $14.50 a share Tuesday, down 1%. Herro said the plan is to continue to hold GE stock because he believes a new management team will turn things around.

Of 39 stocks in a portfolio valued at $2.78 billion, Herro established two new positions and closed a third in the final months of the year. Oakmark Global added stock in Johnson Controls International (

JCI, Financial), which merged with the global fire and security provider, Ireland-based Tyco International (TYC, Financial) in early 2016.

The $18 billion deal created a global conglomerate of commercial-building systems. Johnson Controls sells heating and air conditioning systems for commercial buildings and schools. It is also is one of the worlds largest producers of lead-acid automotive batteries.

Estimates are the two would bring annual revenue of $32 million.

Its second new holding is CoreLogic (

CLGX, Financial), which provides residential and real estate information to the financial real estate markets.

It closed a position in Washington-based Itron Inc. (

ITRI, Financial), which provides solutions that measure energy and water use, after it reached its sell target.

Sector weightings

Oakmarks sector weightings are 27.8% financial services, 26.1% consumer discretionary, 19.5% technology, 15.4% industrials and 6.4% materials, while the remainder is in consumer staples, energy and health care.

In the final months of the year, 44% of holdings were in Europe and the U.K. while 43% were in the U.S. and 7% in Asia, including Japan, China and India. Other positions were in Australia and Mexico.

In a fourth-quarter letter to shareholders, Herro also explained that about 15% of the Swiss franc exposure was defensively hedged at the end of the quarter. He believes the Swiss franc is overvalued versus the U.S. dollar.

Johnson Controls

Herro said he believes the companys shares have underperformed since the Tyco deal. Its stock price is down 9% over the last 12 months.

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The company is led by a new CEO George Oliver, whom we know and respect from his days at Tyco, Herro wrote in a letter to shareholders.

He believes the new CEO has the opportunity to improve operations and achieve merger synergies.

Roughly three-quarters of revenues and two-thirds of earnings come from the legacy Tyco fire and security business and JCIs legacy HVAC and building automation businesses. JCI also is a major producer of car batteries.

In Tuesday trading, Johnson Controls was at just over $38 a share. It was down by 1%.

GuruFocus rates the company a 5 out of 10 in financial strength and a 6 of 10 in profitability and growth. Its price-earnings ratio is 23.79 (lower than 70% of peers); its price-book ratio is 1.7 and its price-sales ratio is 1.18. Both ratios are more than 59% lower than peers.

It has a market cap of $35 billion.

GuruFocus detected one severe warning sign: revenue per share has declined for the last five years. However, the companys operating margin has been expanding and the stock has a Piotroski-F score of 7, which indicates a healthy situation.

CoreLogic Inc.

The company with a market cap of $3.7 billion was trading at just under $46 a share on Tuesday afternoon, down 0.91%.

Herro said the shares have been weak because of worries of a decline in refinancing activities, but he does not believe the issue will have a long-term impact on business.

He says the companys leadership has been improving margins for years and that there is room for growth.

Unique data businesses tend to have great returns and are difficult to replicate, he wrote to shareholders. CoreLogic fits this mold.

He says the company is selling well below public and private market values of other high-quality data providers.

GuruFocus rates CoreLogic one-star in business predictability, a 4 out of 10 in financial strength and 7 of 10 in profitability and growth.

It detected one severe warning sign: the company has issued more than $400 million in debt over the last three years.

However, operating margins are expanding. The companys revenue growth has increased by 16% over five years.

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