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Deep-value investor Francis Chou (Trades, Portfolio), founder of Chou Funds, disclosed two new positions in his fourth-quarter 2018 portfolio, which was released earlier this month.
The guru’s Toronto-based firm’s value-oriented approach to stock picking involves a detailed analysis of a company’s strengths, focusing on its balance sheet, cash flow characteristics, profitability, industry position, competitive advantages, future growth potential and quality of the management team. On its website, the firm notes much less emphasis is placed on short-term market factors that could temporarily be crippling the stock.
Based on these criteria, the firm established holdings in Magna International Inc. (MGA, Financial) and Fiat Chrysler Automobiles NV (FCAU, Financial) during the quarter.
Magna International
Chou invested in 20,000 shares of Magna International for an average price of $48.29 per share, dedicating 0.41% of the equity portfolio to the position.
The Canadian auto parts manufacturer has a $17.39 billion market cap; its shares were trading around $52.99 on Wednesday with a price-earnings ratio of 8.11, a price-book ratio of 1.62 and a price-sales ratio of 0.45.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
GuruFocus rated Magna’s financial strength 6 out of 10. Although the company has issued $1.6 billion in new long-term debt over the last several years, it is at a manageable level due to adequate interest coverage. In addition, the Altman Z-Score of 3.14 indicates the company is in good fiscal health.
The company’s profitability and growth scored an 8 out of 10 rating, driven by an operating margin expansion, strong returns that outperform competitors and a moderate Piotroski F-Score of 5, which indicates business conditions are stable. Magna also has a business predictability rank of 3.5 out of five stars. In addition to having consistent earnings and revenue growth, GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.
Of the gurus invested in Magna International, Hotchkis & Wiley has the largest stake with 1.74% of outstanding shares. Jeremy Grantham (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Scott Black (Trades, Portfolio) are also shareholders.
Fiat Chrysler
The guru picked up 30,000 shares of Fiat Chrysler for an average price of $16.05 per share, allocating 0.20% of the equity portfolio to the holding.
The Italian-American car manufacturer, which is headquartered in the U.K., has a market cap of $29.4 billion; its shares were trading around $14.87 on Wednesday with a price-earnings ratio of 5.73, a price-book ratio of 0.84 and a price-sales ratio of 0.18.
According to the Peter Lynch chart, the stock is undervalued.
Fiat Chrysler’s financial strength was rated 6 out of 10 by GuruFocus. Despite having sufficient interest coverage, the Altman Z-Score of 1.45 warns the company is at risk of going bankrupt.
The automaker’s profitability and growth scored a 7 out of 10 rating, driven by operating margin expansion, a high Piotroski F-Score of 7, which suggests business conditions are healthy, and good returns. Fiat Chrysler’s 2.5-star business predictability rank is on watch, however, as a result of a decline in earnings per share over the past three years. According to GuruFocus, companies with this rank typically see their stocks gain an average of 7.3% per year.
With 6.67% of outstanding shares, Chase Coleman (Trades, Portfolio) is the company’s largest guru shareholder. Ruane Cunniff (Trades, Portfolio), Pioneer, Bill Nygren (Trades, Portfolio), Mohnish Pabrai (Trades, Portfolio), Grantham, Greenblatt, Lee Ainslie (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Ken Heebner (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) also have positions in the stock.
Additional trades
During the quarter, Chou also pared his holdings of Sanofi SA (SNY, Financial), Sears Holdings Corp. (SHLDQ, Financial), Ascent Capital Group Inc. (ASCMA, Financial), MBIA Inc. (MBI, Financial) and Sears Hometown and Outlet Stores Inc. (SHOS, Financial).
The guru’s $220.07 million equity portfolio, which is made up of 27 stocks, is heavily invested in the financial services sector at 46.6%. According to GuruFocus data, the Chou Associates Fund posted a -7.95% return in 2018, underperforming the S&P 500 Index’s return of -5.97%.
Disclosure: No positions.
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