Bill Nygren (Trades, Portfolio), portfolio manager of the Oakmark Fund, disclosed on Wednesday three new positions for the second quarter: Bristol-Myers Squibb Co. (BMY, Financial), Gartner Inc. (IT, Financial) and Hilton Worldwide Holdings Inc. (HLT, Financial).
During the quarter, Nygren’s Oakmark Fund gained 2.1%, underperforming the Standard & Poor’s 500 index benchmark by approximately 1.3%. Nygren said although the fund had strong gains from top holdings like MasterCard Inc. (MA, Financial) and Apple Inc. (AAPL, Financial), key detractors included American Airlines Group Inc. (AAL, Financial) and MGM Resorts International (MGM, Financial).
Guru reiterates “value investing” philosophy
Nygren said in his quarterly shareholder letter that as long-term investors, his team “attempts to identify growing businesses” that offer good value to shareholders and are priced substantially below intrinsic value. Nygren included the following quote from Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEOÂ Warren Buffett (Trades, Portfolio):
“My own thinking has changed drastically from 35 years ago when I was taught to favor tangible assets and to shun businesses whose value depended largely on economic goodwill.”
Nygren views each stock purchase as an investment in the business and not just a stock certificate.
Bristol-Myers Squibb
Nygren invested in 6.5 million shares of Bristol-Myers Squibb for an average price of $54.03 per share. The manager dedicated 1.85% of his equity portfolio to the position.
GuruFocus ranks Bristol-Myers’ profitability 7 out of 10: even though operating margins have declined over the last five years, they are still outperforming 75% of global competitors.
Nygren said while “investors became fearful” that competitors would take share of the cancer market, such fears are overstated as cancer remains a “dangerous disease that is difficult to treat.” Bristol-Myers’ research, development and marketing prowess continue to attract partnerships with promising academic and biotech innovators.
Ray Dalio (Trades, Portfolio)’s Bridgewater Associates also invested in Bristol-Myers during the quarter.
Gartner
Nygren invested in 1.6 million shares of Gartner for an average price of $127.94 per share. The manager dedicated 1.09% of his equity portfolio to the position.
The investor said at first glance, Gartner did not look like a “value stock” as the company’s forward price-earnings ratio of 38.91 ranks lower than 68% of global competitors. Despite this, Nygren also noted that shares of Gartner tumbled on management’s comments to accelerate selling and marketing expenses to increase organic growth. According to generally accepted accounting principles, the expenses are immediately reported, reducing the company’s short-term earnings.
Nygren said since Gartner’s marketing expenses are effectively long-term investments in company growth, Oakmark adjusted the sales and marketing expenses using a six-year “straight-line depreciation” calculation method, i.e., just like GAAP would treat the purchase of a machine with an expected life of six years. The adjusted earnings gives a valuation that allows Gartner to “buy a wonderful company at a fair price,” one of Buffett’s key value investing principles.
GuruFocus ranks Gartner’s business predictability a perfect five stars as the company had consistent revenue and earnings growth over the last 10 years.
Hilton
Nygren invested in 1.279 million shares of Hilton for an average price of $81.35 per share. The manager dedicated 0.52% of his equity portfolio to the position.
GuruFocus ranks Hilton’s profitability 5 out of 10: even though the company’s operating margin has declined over the last five years, its return on equity is outperforming over 99% of global competitors.
Nygren said Oakmark become interested in Hilton as the company has a “widening moat”: the company’s global pipeline share is 22%, approximately four times larger than Hilton’s current share of existing rooms.
Disclosure: No positions.
