Bill Nygren (Trades, Portfolio), portfolio manager of the Oakmark Select Fund, told clients this week that he has added shares of streaming-media provider Netflix (NFLX, Financial) and hotel company Hilton Worldwide (HLT, Financial) to the fund’s portfolio in the fourth quarter.
Netflix has stirred controversy among investors for having stratospheric valuations including a price-earnings ratio in the 300s during 2016 as its price marched continuously higher. Nygren, however, called it in a “value” stock in October during an interview with CNBC.
“If you look at fundamentals, the quality of product Netflix is putting out has only gotten better, and the price they’re offering it at is basically unchanged – a tremendous deal, relative to HBO Now or other audio or video services,” he said. “We think Netflix can continue growing its sub base at something like 20% a year.”
The value investor has held the company in his Oakmark Fund, giving it about 2.28% portfolio space, since the third quarter of 2017 when its stock price averaged $174. It was not until the fourth quarter that it made the cut for his Oakmark Select Fund after a steep slide.
“We purchased Netflix in the quarter because its share price fell roughly 40% from its July high ... Nothing at Netflix has fundamentally changed in our opinion,” Nygren wrote in a fourth-quarter letter released Thursday. “The price merely fell to a level that justified owning it in a concentrated portfolio like Oakmark Select.”
The company’s price-earnings ratio also dropped to 83.8 in the fourth quarter, its lowest since January 2015.
Netflix famously soared 34,814% from its 2002 debut to its peak in July 2018. It remains 19% off the all-time high after gaining back some ground lost in the fourth quarter. Shares were priced around $339 per share Friday following a 27% year-to-date gain.
Hilton Worldwide
Nygren also picked up a stake in Hilton Worldwide, one of the world’s largest hospitality companies. Like Netflix, Hilton stock already appeared in Nygren’s Oakmark Fund. The holding started in the second quarter and occupied around 0.5% of the portfolio.
In his letter, Nygren said he bought the stock for the same reasons he listed when he bought it for the Oakmark Fund, calling it an “asset-light, fee-driven business” with a “resilient earnings profile” that was “underappreciated. Nygren also noted its high operating income growth and widening competitive moat.
“The company’s unit growth leads the industry and its global pipeline share is almost 22%—over four times larger than its current share of existing rooms (approximately 5%),” Nygren wrote.
Nygren bought it for the Oakmark Select Fund in the fourth quarter when it became more attractive.
“Additionally, the company’s valuation improved as its share price fell due to broad skepticism about cyclical businesses,” Nygren wrote in his fourth-quarter letter. “Our analysis of the company is based on through-cycle economics, which accounts for the cyclical gyrations of the business.”
Hilton’s price plunged more than 22% from Sept. 27 to its 52-week low on Oct. 24 around $64. The price since rise to $71.90 as of Friday.
The price drop also reduced the company’s valuation ratios to multi-year lows. Its price-earnings ratio fell to as low as 14.09 and has since risen to 15.9, near a two-year low. Hilton Worldwide’s price-sales ratio tumbled near a two-year low at 2.32.
The cyclical company also has five-year average decline rates of 5% for revenue, 4% for Ebitda and 1.8% for free cash flow.
Other portfolio changes
Nygren disclosed that he opened positions in Anadarko Petroleum (APC, Financial) and Lear Corp. (LEA, Financial), and exited positions in Chesapeake Energy (CHK, Financial), Adient (ADNT, Financial) and Oracle (ORCL, Financial).
See Bill Nygren (Trades, Portfolio)’s Oakmark Fund portfolio here.
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