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Holly LaFon
Holly LaFon
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Bill Nygren Buys Constellation, S&P Global, Sells 5 in 1st Quarter

Oakmark manager says S&P traded below his estimate of intrinsic value

April 16, 2019 | About:

Bill Nygren (Trades, Portfolio), portfolio manager of the Oakmark Fund, started two positions and exited five in the first quarter, he said ahead of Securities and Exchange Commission deadlines for portfolio disclosure.

In a first-quarter letter released last week, Nygren discussed purchases of Constellation Brands (NYSE:STZ) and S&P Global Inc. (NYSE:SPGI). He also to clients that he sold his portfolio’s positions in Aon (AON), Bristol-Myers Squibb (NYSE:BMY), Diageo (NYSE:DEO), Flex Ltd. (NASDAQ:FLEX) and Unilever (NYSE:UN).

Nygren’s Oakmark Fund seeks stocks of growing companies with shareholder-oriented management that are priced lower than their intrinsic value and holds for the long term. With this approach, it has garnered an average return since its 1991 inception of 12.36%, beating the S&P 500’s 9.71%. In the fourth quarter, it nearly met its benchmark index, returning 13% versus 14% for the S&P 500.

In the first quarter, Nygren trimmed the portfolio to 53 stocks from the 56 it held at fourth-quarter end. The fund had $18.18 billion in assets under management, with financials forming the bulk of holdings at 25.5% of net assets and information technology stocks following at 17.2%.

Nygren will report details of his portfolio moves, such as number of shares purchased, when managers of large funds submit filings with the SEC 45 days after the end of the quarter. But he provided some commentary on his decisions in his letter.

Buys

Constellation Brands Inc. (NYSE:STZ)

Nygren called Constellation Brands “the top imported beer company in the U.S. and one of the world’s leading wine producers.” Its share price has increased 18% year to date, closing at $190 on Tuesday. Nygren purchased shares at $175.33, between their 52-week high of $236.62 and 52-week low of $150.37.

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Constellation Brands has a market cap of $36.06 billion; its shares were traded with a price-earnings ratio of 10.80 and price-sales ratio of 4.57. The trailing 12-month dividend yield of Constellation Brands is 1.55%. The forward dividend yield of Constellation Brands is 1.57%. Constellation Brands had an annual average earnings growth of 24.8% over the past 10 years. GuruFocus rated Constellation Brands the business predictability rank of 3.5-star.

Nygren commented:

"We believe that the company’s valuation is compelling due to its robust long-term growth outlook of its strong brands within both beer and wine. Over the past five years, Constellation’s beer segment — which includes brands such as Corona, Modelo and Pacifico, among others — has grown its sales volume and revenue at a 10% and 12% CAGR, respectively. The company was able to accomplish this impressive growth during a period when industry volume growth remained relatively flat. Despite a market-leading medium-term growth outlook that calls for high single-digit revenue growth within its beer segment and low-to-mid single-digit growth within its wine and spirits portfolio, Constellation trades at a meaningful discount to other consumer packaged goods companies that are experiencing slow to no growth. In addition to its portfolio of brands within beer, wine and spirits, the company has established a strategic partnership and large ownership stake in the world’s largest publicly traded cannabis company, Canopy Growth Group. We believe this partnership positions Constellation to potentially become one of the bigger beneficiaries in a category that some project could exceed $200 billion in global demand over the next 10 to 15 years. On our one-year forward earnings estimate, Constellation trades in line with the earnings multiple for the overall market without giving the company any value for its significant stake in Canopy. We believe this presents an opportunity to invest in an above-average business at just an average price."

S&P Global Inc. (NYSE:SPGI)

Shares of ratings and data company S&P Global Inc. gained 28% year to date, reaching $216.90 to close Tuesday. Nygren bought when share traded at $210.55, which is between a 52-week high of $217.94 and 52-week low of $256.68.

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S&P Global has a market cap of $53.39 billion; its shares were traded with a price-earnings ratio of 28.05 and price-sales ratio of 8.80. The trailing 12-month dividend yield of S&P Global is 0.96%. The forward dividend yield of S&P Global is 1.05%. S&P Global had an annual average earnings growth of 8.30% over the past 10 years.

Nygren commented:

"S&P Global is a collection of businesses that provides ratings and benchmarks that are essential to financial markets around the world. Bonds that are issued with an S&P rating pay meaningfully less in interest per year, which generates savings for debt issuers far in excess of the cost of the rating. Also, ETFs and mutual funds tied to S&P Global’s indexes, especially the S&P 500, are gaining market share in the fast-growing passive investing market. And S&P Global’s data and analytics services provide unique insights that help customers make critical decisions across their businesses. Each of S&P Global’s segments share the common characteristic of providing value for customers that is much greater than the prices they charge. As a result, S&P Global is able to raise prices and generate above-average earnings growth. Indeed, over the past five years, S&P Global has grown its earnings per share by over 20% annually, while returning over 100% of free cash flow to shareholders. We believe S&P Global is an exceptional company with a long runway for growth, trading at a price that is below our estimate of intrinsic value."

Sales

Aon (AON)

Nygren said he sold Aon as it “approached our estimate of intrinsic value.” The fund started the position in the second quarter of 2012 when the price averaged $48, and the price reached $170.70 at the end of the first quarter of 2019.

Aon Plc has a market cap of $42.46 billion; its shares were traded around $176.93 Tuesday with a price-earnings ratio of 38.70 and price-sales ratio of 4.05. The trailing 12-month dividend yield of Aon Plc stocks is 0.91%. The forward dividend yield of Aon Plc is 1%. Aon Plc had an annual average earnings growth of 8.20% over the past 10 years. GuruFocus rated Aon Plc the business predictability rank of 2-star.

Bristol-Myers Squibb (NYSE:BMY)

Nygren sold Bristol-Myers Squibb “after the company announced an acquisition that we believe was sub-optimal, signaling a reduction in the value of their core business.” He started the position in the second quarter of 2018 when the price averaged $54, and the price closed at $47.71 at the end if the first quarter of 2019. The holding was 1.99% of the portfolio.

Bristol-Myers Squibb Co. has a market cap of $75.19 billion; its shares were traded around $46.02 Tuesday with a price-earnings ratio of 15.19 and price-sales ratio of 3.32. The trailing 12-month dividend yield of Bristol-Myers Squibb Co. is 3.53%. The forward dividend yield of Bristol-Myers Squibb Co. is 3.53%. Bristol-Myers Squibb Co. had an annual average earnings growth of 18.40% over the past five years.

Diageo (NYSE:DEO)

Nygren sold Diageo when it reached his estimate of intrinsic value. He started the position in the first quarter of 2014 when the price averaged $125. The stock closed the first quarter of 2019 at $163.61. The holding represented 1.44% of the portfolio.

Diageo Plc has a market cap of $96.85 billion; its shares were traded around $162.42 Tuesday with a price-earnings ratio of 25.81 and price-sales ratio of 6.34. The trailing 12-month dividend yield of Diageo Plc is 2.13%. The forward dividend yield of Diageo Plc is 1.67%. Diageo Plc had an annual average earnings growth of 4.5% over the past 10 years. GuruFocus rated Diageo Plc the business predictability rank of 3-star.

Flex Ltd. (NASDAQ:FLEX)

In his letter, Nygren said, We sold Flex after the company announced disappointing progress in its consumer electronics segment and the termination of its partnership with Nike. These developments lowered our estimate of intrinsic value, making the stock’s return potential less competitive with the rest of the portfolio and other potential additions.”

He started the position in the first quarter of 2018 when the price averaged $18, and the stock was $10 at the end of the first quarter of 2019. The holding represented 0.11% of the portfolio.

Flex Ltd. has a market cap of $5.98 billion; its shares were traded around $11.47 Tuesday with a price-earnings ratio of 45.88 and price-sales ratio of 0.23. Flex Ltd. had an annual average earnings growth of 7.8% over the past five years.

Unilever (NYSE:UN)

Nygren also sold Unilever because it reached their estimate of intrinsic value. He started the position in the fourth quarter of 2010 when the price averaged $30. The company’s share price reached $58.29 at the close of the first quarter of 2019. The holding represented 0.1% of the portfolio.

Unilever NV has a market cap of $150.21 billion; its shares were traded around $57.56 Tuesday with a price-earnings ratio of 14.62 and price-sales ratio of 2.68. The trailing 12-month dividend yield of Unilever NV is 3.17%. The forward dividend yield of Unilever NV is 3.08%. Unilever NV had an annual average earnings growth of 6.90% over the past 10 years. GuruFocus rated Unilever NV the business predictability rank of 2.5-star.

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

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About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


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