The T Rowe Price Equity Income Fund (Trades, Portfolio) released its second-quarter portfolio earlier this week, listing nine new holdings.
Managed by Brian Linehan, the fund, which is part of Baltimore-based asset management firm T. Rowe Price, seeks to achieve high levels of dividend income and long-term capital growth by investing in stocks that are undervalued or have a strong track record of paying dividends.
Based on these criteria, the fund’s top five new buys for the quarter were Cognizant Technology Solutions Corp. (CTSH, Financial), Allergan PLC (AGN, Financial), Bunge Ltd. (BG, Financial), Corteva Inc. (CTVA, Financial) and Targa Resources Corp. (TRGP, Financial).
Cognizant Technology Solutions
T. Rowe Price invested in 1.6 million shares of Cognizant, allocating 0.55% of the equity portfolio to the stake. The stock traded for an average price of $65.64 per share during the quarter.
The Teaneck, New Jersey-based internet technology services company has a $37.54 billion market cap; its shares were trading around $65.97 on Wednesday with a price-earnings ratio of 18.90, a price-book ratio of 3.41 and a price-sales ratio of 2.35.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
Boosted by comfortable interest coverage, GuruFocus rated Cognizant’s financial strength 8.2 out of 10. In addition, the robust Altman Z-Score of 7.46 indicates the company is in good fiscal health.
The company’s profitability and growth scored an 8 out of 10 rating. Although the operating margin is in decline, it still outperforms over half of its competitors. Cognizant is also 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 four out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 9.8% per year over a 10-year period.
Of the gurus invested in Cognizant, Richard Pzena (Trades, Portfolio) has the largest stake with 1.34% of outstanding shares. Other top guru shareholders include Jeremy Grantham (Trades, Portfolio), the Matthews Pacific Tiger Fund (Trades, Portfolio), Jim Simons' (Trades, Portfolio) Renaissance Technologies, Pioneer Investments (Trades, Portfolio), Yacktman Asset Management (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), David Rolfe (Trades, Portfolio) and Jerome Dodson (Trades, Portfolio).
Allergan
The fund picked up 620,000 shares of Allergan, dedicating 0.54% of the equity portfolio to the position. During the quarter, the stock traded for an average per-share price of $138.45.
The Irish pharmaceutical company has a market cap of $54.03 billion; its shares were trading around $164.40 on Wednesday with a price-book ratio of 0.89 and a price-sales ratio of 3.53.
According to the median price-sales chart, the stock is overvalued.
Allergan’s financial strength was rated 5 out of 10 by GuruFocus. In addition to weak interest coverage, the Altman Z-Score of 0.84 warns the company is at risk of going bankrupt.
The company’s profitability and growth scored a 6 out of 10 rating. Although the margins and returns underperform a majority of industry peers, Allergan has a moderate Piotroski F-Score of 6. Its one-star business predictability rank is on watch as a result of declining revenue per share over the past 12 months. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.
With 4.84% of outstanding shares, the Vanguard Health Care Fund (Trades, Portfolio) is Allergan’s largest guru shareholder. Other top guru investors include Seth Klarman (Trades, Portfolio), David Tepper (Trades, Portfolio), Simons’ firm, Mason Hawkins (Trades, Portfolio), John Paulson (Trades, Portfolio), Diamond Hill, David Carlson (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Pioneer, First Eagle Investment (Trades, Portfolio), Private Capital (Trades, Portfolio) and Arnold Van Den Berg (Trades, Portfolio).
Bunge
The Equity Income Fund bought a 1.76 million-share stake in Bunge, expanding the equity portfolio 0.51%. During the quarter, the stock traded for an average price of $53.24 per share.
The agribusiness and food company, which is headquartered in White Plains, New York, has a $7.91 billion market cap; its shares were trading around $55.45 on Wednesday with a price-earnings ratio of 27.53, a price-book ratio of 1.44 and a price-sales ratio of 0.18.
Based on the Peter Lynch chart, the stock appears to be overvalued.
Weighed down by new long-term debt and poor interest coverage, GuruFocus rated Bunge’s financial strength 5.7 out of 10. The Altman Z-Score of 3.41, however, suggests the company is in good fiscal health.
The company’s profitability and growth did not fare as well, scoring a 4 out of 10 rating. In addition to a declining operating margin and shrinking revenue per share, Bunge has poor returns that underperform a majority of competitors. The company is supported by a moderate Piotroski F-Score of 5, however, and a one-star business predictability rank.
With its purchase of 1.24% of outstanding shares, T Rowe Price is Bunge’s largest guru shareholder. Simons’ firm, Louis Moore Bacon (Trades, Portfolio), Hotchkis & Wiley, Pioneer, Michael Price (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Grantham, George Soros (Trades, Portfolio) and several other gurus also have positions in the stock.
Corteva
T. Rowe Price purchased 2.68 million shares of Corteva, giving it 0.41% space in the equity portfolio. During the quarter, shares traded for an average price of $27.28.
The Wilmington, Delaware-based agricultural company, which was spun off of DuPont (DD, Financial) in June, has a market cap of $20.70 billion; its shares were trading around $27.57 on Wednesday with a price-book ratio of 0.88 and a price-sales ratio of 1.45.
GuruFocus estimates the stock has declined 5% since it began trading.
Corteva’s financial strength scored a 6.5 out of 10 rating. Despite having sufficient interest coverage, the Altman Z-Score of 0.66 warns the company is in danger of bankruptcy.
The company’s profitability and growth did not fare as well, scoring a 3 out of 10 rating on the back of margins and returns that underperform industry peers.
The fund has the largest stake in Corteva, holding 0.36% of outstanding shares. Pioneer also has a position in the stock.
Targa Resources
Having previously exited a position in Targa Resources in the first quarter of 2017, the fund entered a new 1.18 million-share stake, impacting the equity portfolio by 0.24%. The shares traded for an average price of $39.72 during the quarter.
The midstream energy company, which is headquartered in Houston, has a $9.49 billion market cap; its shares were trading around $40.17 on Wednesday with a price-book ratio of 1.64 and a price-sales ratio of 0.93.
According to the median price-sales chart, the stock is overvalued.
GuruFocus rated Targa’s financial strength 4.2 out of 10. As a result of issuing approximately $2.3 billion in new long-term debt over the last three years, the company has poor interest coverage. In addition, the Altman Z-Score of 1.10 warns the company is in fiscal distress as it has recorded decreasing revenue per share over the past five years.
Weighed down by a declining operating margin and poor returns, the company’s profitability and growth scored a 3 out of 10 rating. Despite the weakness, Targa is supported by a moderate Piotroski F-Score of 4 and a one-star business predictability rank.
T. Rowe Price is now the company’s largest guru shareholder with 0.51% of outstanding shares. Other top guru investors are Simons’ firm, Steven Cohen (Trades, Portfolio), Pioneer and T Boone Pickens (Trades, Portfolio).
Additional trades
During the quarter, the fund also established positions in MGM Resorts International (MGM, Financial), AXA Equitable Holdings Inc. (EQH, Financial), United Technologies Corp. (UTX, Financial) and Snap-on Inc. (SNA, Financial).
T. Rowe Price’s $19.18 billion equity portfolio, which is composed of 116 stocks, is heavily invested in the financial services sector at 24.01%.
According to GuruFocus data, the Equity Income Fund returned -9.3% in 2018, underperforming the S&P 500 Index’s -4.38% return.
Disclosure: No positions.
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