Oakmark International Small Cap Fund Favors British Stocks in 1st Quarter

Fund starts positions in Babcock International, Dignity

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Jun 05, 2018
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The Oakmark International Small Cap Fund disclosed it established two new positions when it released its first-quarter portfolio last week.

With the goal of capital appreciation, the $2.9 billion fund, which is managed by David Herro (Trades, Portfolio), invests in foreign, small-cap companies that are trading at a discount to the firm’s estimate of intrinsic value.

The two stocks the fund opened positions in were Babcock International Group PLC (LSE:BAB, Financial) and Dignity PLC (LSE:DTY, Financial), which are both British companies.

Babcock International

The fund invested in 4.9 million shares of Babcock International for an average price of 6.79 pounds ($9.06) per share, giving the stake 1.66% portfolio space.

The London-based engineering company has a market cap of 4.32 billion pounds; its shares closed at 8.54 pounds on Monday with a price-earnings ratio of 12.75, a price-book ratio of 1.50 and a price-sales ratio of 0.93.

The Peter Lynch chart below shows the stock is trading below its fair value, suggesting it is undervalued.

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GuruFocus rated Babcock’s financial strength 5 out of 10. While the company’s level of interest coverage meets Benjamin Graham’s threshold of 5, its Altman Z-Score of 1.97 indicates it is under some financial pressure. In addition, its Beneish M-Score of -0.69 suggests the company may manipulate its financial statements. The company’s profitability and growth fared a bit better, scoring a 7 out of 10 rating as its operating margin is expanding. The rating is also supported by a moderate Piotroski F-Score of 4 and a business predictability rating of 4.5 stars out of five.

With its purchase of 0.98% of outstanding shares, the fund became Babcock International’s largest shareholder among the gurus. Francisco Garcà­a Paramés (Trades, Portfolio) and Bernard Horn (Trades, Portfolio) also own the stock.

Dignity

Oakmark picked up 2.4 million shares of Dignity for an average price of 10.6 pounds per share, expanding the portfolio 1.06%.

The British company, which is one of the largest providers of funeral services in the U.K., has a market cap of 534.1 million pounds; its shares closed at 10.68 pounds on Monday with a price-earnings ratio of 9.21, a price-book ratio of 11.49 and a price-sales ratio of 1.65.

According to the Peter Lynch chart below, the stock is undervalued since it is trading below its fair value.

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Weighed down by insufficient interest coverage and a low Altman Z-Score of 1.16, which implies the company is at risk of bankruptcy, Dignity’s financial strength was rated 4 out of 10 by GuruFocus. The company’s profitability and growth, however, fared much better with a score of 7 out of 10, supported by an expanding operating margin, a moderate Piotroski F-Score of 5 and a one-star business predictability rating.

Oakmark holds 4.82% of the company’s outstanding shares.

Other trades

During the quarter, the fund also exited its Wirecard AG (XTER:WDI, Financial), Melco International Development Ltd. (HKSE:00200, Financial), Finning International Inc. (TSX:FTT, Financial) and Bucher Industries AG (XSWX:BUCN) holdings after making significant gains.

The portfolio, which is composed of 58 holdings, is largely invested in the industrials sector. According to the fund’s fact sheet, U.K. stocks have the largest representation in the portfolio, followed by Swiss securities. Year to date, it has posted a return of -3.38%. Its benchmark, the MSCI World ex. U.S. Small Cap Index, has posted a -0.50% return.

View the fund’s entire portfolio here.

Disclosure: No positions.