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Sydnee Gatewood
Sydnee Gatewood
Articles (844) 

Sarah Ketterer’s Top 5 New Buys

Guru releases 1st-quarter portfolio

Causeway Capital Management leader Sarah Ketterer (Trades, Portfolio) revealed 10 new positions when she released her first-quarter portfolio earlier this week.

The guru’s Los Angeles-based firm, which she founded in 2001 with Harry Hartford, says on its website that it seeks to achieve superior risk-adjusted returns by investing in mispriced equities in both developed and emerging markets.

Based on these criteria, Ketterer’s top five new buys for the quarter were Linde PLC (NYSE:LIN), Merck & Co. Inc. (NYSE:MRK), Gerdau SA (NYSE:GGB), the iShares MSCI Emerging Index Fund (EEM) and Telefonica Brasil SA (NYSE:VIV).

Linde

The guru invested in 7.8 million shares of Linde, allocating 13.94% of the equity portfolio to the stake. The stock traded for an average price of $165.92 per share during the quarter.

The U.K.-based chemical company has a $101.54 billion market cap; its shares traded around $186.84 on Thursday with a price-earnings ratio of 15.02, a price-book ratio of 2.01 and a price-sales ratio of 4.05.

The Peter Lynch chart shows the stock is trading near its fair value.

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GuruFocus rated Linde’s financial strength 6 out of 10, driven by adequate interest coverage. The Altman Z-Score of 2.38, however, indicates the company is under some fiscal pressure.

The company’s profitability and growth scored a 7 out of 10 rating. Although the operating margin is in decline, it still outperforms 90% of competitors. In addition, Linde is supported by strong returns, consistent earnings and revenue growth, a moderate Piotroski F-Score of 6, which implies operations are stable, and a business predictability rank of three out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 8.2% per year.

Ketterer is now the company’s largest guru shareholder with 1.45% of outstanding shares. During the quarter, Steven Cohen (Trades, Portfolio) also established a position in the stock, while Pioneer Investments (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Diamond Hill Capital (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Bernard Horn (Trades, Portfolio) added to their holdings.

Merck

Ketterer picked up 1.7 million shares of Merck, dedicating 1.46% of the equity portfolio to the stake. Shares traded for an average price of $78.33 during the quarter.

The pharmaceutical company, which is headquartered in Kenilworth, New Jersey, has a market cap of $204.58 billion; its shares were trading around $79.46 on Thursday with a price-earnings ratio of 25.05, a price-book ratio of 7.51 and a price-sales ratio of 4.88.

According to the Peter Lynch chart, the stock is overvalued.

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Merck’s financial strength was rated 6 out of 10 by GuruFocus. Despite recording an operating income loss and issuing approximately $75 million in new long-term debt over the last three years, the company has sufficient interest coverage and the Altman Z-Score of 4.01 suggests it is in good fiscal standing.

The company’s profitability and growth scored a 7 out of 10 rating, boosted by an expanding operating margin and a high Piotroski F-Score of 7, which indicates business conditions are healthy. Merck also has a one-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.

Of the gurus invested in Merck, the Vanguard Health Care Fund (Trades, Portfolio) has the largest stake with 0.70% of outstanding shares. Stanley Druckenmiller (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also established positions during the quarter, while John Buckingham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) beefed up their holdings.

Gerdau

The investor established a 10.7 million-share stake in Gerdau, expanding the equity portfolio 0.42%. During the quarter, the stock traded for an average price of $4.08 per share.

The Brazilian steel producer has a $5.61 billion market cap; its shares were trading around $3.46 on Thursday with a price-earnings ratio of 10.30, a price-book ratio of 0.92 and a price-sales ratio of 0.51.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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GuruFocus rated Gerdau’s financial strength 6 out of 10. In addition to poor interest coverage, the Altman Z-Score of 1.95 suggests the company is under some fiscal stress.

The company’s profitability and growth scored a 7 out of 10 rating. In addition to an expanding operating margin, Gerdau is supported by a high Piotroski F-Score of 7 and a one-star business predictability rank.

With 0.75% of outstanding shares, Ketterer is now the company’s largest guru shareholder. Ken Heebner (Trades, Portfolio), Fisher, Pioneer and Jeremy Grantham (Trades, Portfolio) also own the stock.

Emerging Index Fund

Having previously closed a position in the iShares MSCI Emerging Index Fund in the fourth quarter, the guru opened a new 969,437-unit holding, giving it 0.42% space in the equity portfolio. The exchange-traded fund averaged around $42.09 per unit during the quarter.

The ETF, which tracks the performance of an index composed of large-and mid-cap emerging market equities, has a market cap of $32 billion; it was trading around $41.09 on Thursday with a price-earnings ratio of 12.67 and a price-book ratio of 1.63.

The 14-day relative strength index is 34.07, suggesting it is near oversold levels.

Telefonica Brasil

Ketterer purchased 2.7 million shares of Telefonica Brasil, impacting the equity portfolio by 0.34%. The stock traded for an average price of $12.61 per share during the quarter.

The Brazilian telecom company has an $18.47 billion market cap; its shares were trading around $11.04 on Thursday with a price-earnings ratio of 7.50, a price-book ratio of 0.95 and a price-sales ratio of 1.55.

The Peter Lynch chart suggests the stock is undervalued.

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Telefonica Brasil’s financial strength was rated 7 out of 10 by GuruFocus. While the company has adequate interest coverage, the Altman Z-Score of 1.93 indicate it is under some fiscal stress as it has recorded a decline in revenue per share over the last five years.

The company scored a 6 out of 10 rating for profitability and growth. In addition to operating margin expansion, Telefonica is supported by strong returns that outperform industry peers, a moderate Piotroski F-Score of 6 and a one-star business predictability rank.

Of the gurus invested in Telefonica Brasil, Charles Brands has the largest stake with 0.34% of outstanding shares. Richard Pzena (Trades, Portfolio), Simons’ firm, NWQ Managers (Trades, Portfolio) and Pioneer are also shareholders.

Additional trades

During the quarter, Ketterer also established positions in SAP SE (NYSE:SAP), Total SA (NYSE:TOT), Azul SA (NYSE:AZUL), RELX PLC (NYSE:RELX) and the iShares MSCI India Small Cap ETF (SMIN).

The guru’s $9.9 billion equity portfolio, which is composed of 89 stocks, is largely invested in the technology, financial services, basic materials and energy sectors.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am an editorial assistant at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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