Bill Nygren Buys DXC Technology, Charles Schwab

Oakmark Fund manager discloses some of his portfolio update

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Oct 19, 2018
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Influential value investor Bill Nygren (Trades, Portfolio) disclosed this week that he purchased two stocks for his Oakmark Fund in the third quarter, ahead of the deadline for portfolio updates.

Nygren, the chief investment officer for U.S. Equities at Oakmark, wrote about the purchased stocks in his third-quarter shareholder letter. A full list of his buys and sells is not required by the Securities and Exchange Commission until 45 days after the end of the quarter.

Nygren purchased DXC Technology (DXC, Financial), an information technology company formed through the merger of Computer Sciences Corp. and Hewlett Packard Enterprise Services, for $93.52 per share. The stock’s price has since declined to $88.30 with an 8% gain year to date.

Nygren discussed some of the reasons for the buy:

“The company has established a global footprint and a broad suite of technology offerings, which places it in a limited group of vendors that are able to serve the IT needs of large multinational corporations. We believe CEO Mike Lawrie is among the best turnaround managers at work today. He has a history of taking leadership of underperforming IT companies, then removing costs, divesting assets and re-directing investments into high-return opportunities—a formula that has driven tremendous gains in shareholder value over time.

We expect Lawrie will continue to execute on this proven blueprint as he integrates the HP acquisition and we believe that he is uniquely suited to uncover substantial hidden profits in this $19B business. DXC currently trades at just 10x 2019 consensus earnings, a significant discount to the S&P 500 multiple of 17x, despite DXC profits being forecasted to grow at a rate faster than the market for the foreseeable future.”

He made his Charles Schwab (SCHW, Financial) purchase at $49.15 per share, slightly above its $46.83 price at market close Friday. Shares of the bank and brokerage firm traded down 9% this year. Nygren named the company’s size and recent growth, along with the rise in interest rates, as attractive features of the investment:

“Schwab is the largest discount brokerage firm in the United States with more than $3 trillion in client assets and 11 million active brokerage accounts. This size provides Schwab with meaningful scale advantages over its smaller competitors. As the largest discount brokerage firm, the company is able to offer lower prices and invest more in superior customer service and technology than its peers. Schwab management calls this its “no trade-offs” policy—i.e., investing to provide the best product at the lowest price, and these investments attract even more clients to Schwab’s platform. As a result, Schwab has been able to grow its client assets at a double-digit rate in recent years, and given that the company still has less than 15% market share, we believe such growth should continue for the foreseeable future.

The company also meaningfully benefits from rising interest rates, as the higher rates allow Schwab to reinvest its bank deposits at higher yields. We believe the combination of client asset growth and rising interest rates should drive substantial asset growth at Schwab in the coming years, and on our estimates, the company is currently valued at a discount to the overall S&P 500 P/E multiple. We believe this represents a bargain price for a well above average business.”

The Oakmark Fund rose 4.2% for the third quarter, boosting its gain for the first nine months of 2018 to 11.8%. The performance fell shy of the S&P 500’s advance of 7.7% for the quarter and 17.9% for the first nine months. Nygren said fund is prone to underperform for short periods while beating the index over the long term.

Returns on holdings were mixed, with its best performing stock, Netflix (NFLX, Financial), soaring 106% and its worst performer, General Electric (GE, Financial), down 51%. Nygren, who seeks stocks trading at discounts to their intrinsic value, discussed why he believes tech high-flier Netflix is a value stock here.

See Bill Nygren (Trades, Portfolio)'s portfolio here.

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