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Sydnee Gatewood
Sydnee Gatewood
Articles (917) 

The Top 5 Buys of Ken Heebner’s CGM

Growth-oriented firm releases 2nd-quarter portfolio

Ken Heebner (Trades, Portfolio)’s Capital Growth Management released its second-quarter portfolio last week, listing 19 new holdings.

With a focus on growth, the guru’s Boston-based firm has historically made bold and swift sector calls. Additionally, Heebner is known for making large bets on stocks he is strongly convicted about.

Based on these criteria, the firm’s top five new buys for the quarter were NVR Inc. (NYSE:NVR), Microsoft Corp. (NASDAQ:MSFT), Oracle Corp. (NYSE:ORCL), Target Corp. (NYSE:TGT) and L3Harris Technologies Inc. (NYSE:LHX).

NVR

Having previously closed out of a position in NVR in the second quarter of 2018, the firm established a new 14,800-share holding, giving it 3.50% space in the equity portfolio. The stock traded for an average price of $3,206.30 per share during the quarter.

The Reston, Virginia-based homebuilder has a $12.74 billion market cap; its shares were trading around $3,493.64 on Monday with a price-earnings ratio of 16.79, a price-book ratio of 5.89 and a price-sales ratio of 1.89.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

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NVR’s financial strength and profitability and growth were both rated 8 out of 10 by GuruFocus. Supported by a comfortable level of interest coverage, the robust Altman Z-Score of 11.91 indicates the company is in good financial standing.

The company also has an expanding operating margin, strong returns that outperform a majority of competitors, consistent earnings and revenue growth and a high Piotroski F-Score of 7, which implies business conditions are healthy. NVR also has 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 annum over a 10-year period.

Of the gurus invested in NVR, Diamond Hill Capital (Trades, Portfolio) has the largest position with 2.91% of outstanding shares. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, the Smead Value Fund (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) are also shareholders.

Microsoft

Heebner’s firm invested in 324,000 shares of Microsoft, allocating 3.05% of the equity portfolio to the position. It previously sold out of the stock in the third quarter of 2013. The shares traded for an average price of $126.89 during the quarter.

The software company, which is headquartered in Redmond, Washington, has a market cap of $1.05 trillion; its shares were trading around $136.69 on Monday with a price-earnings ratio of 27.08, a price-book ratio of 10.29 and a price-sales ratio of 8.45.

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

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GuruFocus rated Microsoft’s financial strength 7 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 4.96, which suggests it is in good financial health.

The company’s profitability and growth scored a 9 out of 10 rating. In addition to operating margin expansion, Microsoft is supported by strong returns, steady earnings and revenue growth, a high Piotroski F-Score of 8 and a four-star business predictability rank.

With 0.49% of outstanding shares, PRIMECAP Management (Trades, Portfolio) is the company’s largest guru shareholder. Other top guru investors include Dodge & Cox, Ken Fisher (Trades, Portfolio), Pioneer, Chase Coleman (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss and Steve Mandel (Trades, Portfolio).

Oracle

After previously divesting of a position in Oracle in fourth-quarter 2011, Capital Growth picked up a new 750,000-share holding. The trade had an impact of 3% on the equity portfolio. During the quarter, the stock traded for an average per-share price of $54.10.

The California-based software company has a $179.80 billion market cap; its shares were trading around $53.38 on Monday with a price-earnings ratio of 17.80, a price-book ratio of 8.93 and a price-sales ratio of 5.03.

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

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Oracle’s financial strength was rated 5 out of 10 by GuruFocus. Although the company has sufficient interest coverage, the Altman Z-Score of 2.31 suggests it is under some financial pressure since it has poor earnings quality.

The company’s profitability and growth scored a 7 out of 10 rating. Although the operating margin is in decline, the company is supported by returns that outperform a majority of industry peers, a moderate Piotroski F-Score of 6, which suggests business conditions are stable, consistent earnings and revenue growth and a 2.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 7.3% per year.

First Eagle Investment (Trades, Portfolio) has the largest stake in Oracle with 0.94% of outstanding shares. Barrow, Hanley, Mewhinney & Strauss, Fisher, Hotchkis & Wiley, Jeremy Grantham (Trades, Portfolio), PRIMECAP, Yacktman Asset Management (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and Sarah Ketterer (Trades, Portfolio), among others, are also shareholders.

Target

Heebner’s firm purchased 415,000 shares of Target, expanding the equity portfolio 2.53%. It previously sold out of the stock in the third quarter of 2012. During the quarter, the stock traded for an average price of $80.85 per share.

The retailer, which is headquartered in Minneapolis, has a market cap of $42.22 billion; its shares were trading around $82.41 on Monday with a price-earnings ratio of 14.35, a price-book ratio of 3.85 and a price-sales ratio of 0.56.

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

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GuruFocus rated Target’s financial strength 6 out of 10, driven by sufficient interest coverage and a high Altman Z-Score of 3.24.

The company’s profitability and growth scored a 7 out of 10 rating. Although the operating margin is in decline, it still outperforms over half of its competitors. Target also has strong returns, consistent earnings and revenue growth, a moderate Piotroski F-Score of 5 and a four-star business predictability rank.

Of the gurus invested in Target, Barrow, Hanley, Mewhinney & Strauss has the largest stake with 0.57% of outstanding shares. Other top guru shareholders include Dodge & Cox, Pioneer, Mairs and Power (Trades, Portfolio), Smead, Simons’ firm, Louis Moore Bacon (Trades, Portfolio), Grantham, Ray Dalio (Trades, Portfolio), Greenblatt, John Hussman (Trades, Portfolio), Richard Snow (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Fisher.

L3Harris Technologies

The firm invested in 185,000 shares of L3 Harris Technologies, dedicating 2.46% of the equity portfolio to the holding. The stock traded for an average price of $180.31 per share during the quarter.

The Melbourne, Florida-based technology company has a $46.75 billion market cap; its shares were trading around $211.03 on Monday with a price-earnings ratio of 26.86, a price-book ratio of 7.39 and a price-sales ratio of 3.74.

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

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L3Harris’ financial strength was rated 6 out of 10 by GuruFocus. In addition to adequate interest coverage, the high Altman Z-Score of 5.28 suggests it is in good financial health.

The company’s profitability and growth fared even better, scoring an 8 out of 10 rating on the back of strong margins and returns that outperform over half of industry peers, predictable earnings and revenue growth, a high Piotroski F-Score of 7 and a 3.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.

With 1.65% of outstanding shares, the T Rowe Price Equity Income Fund (Trades, Portfolio) is the company’s largest guru shareholder. Other top guru investors include Cohen, Pioneer, Simons’ firm, Mario Gabelli (Trades, Portfolio), Bacon and Murray Stahl (Trades, Portfolio).

Additional trades

During the quarter, Capital Growth also established positions in Sinclair Broadcast Group Inc. (NASDAQ:SBGI), CarMax Inc. (NYSE:KMX), Prologis Inc. (NYSE:PLD), Kimco Realty Corp. (NYSE:KIM), Advanced Micro Devices Inc. (NASDAQ:AMD), Invitation Homes Inc. (NYSE:INVH), Levi Strauss & Co. (LEVI), Ambev SA (ABEV), American Homes 4 Rent (AMH), Best Buy Co. Inc. (BBY), Tim Participacoes SA (TSU), Quanta Services Inc. (PWR), Delta Air Lines Inc. (DAL) and PulteGroup Inc. (PHM).

Heebner’s $1.42 billion equity portfolio, which is composed of 42 stocks, is largely invested in the real estate and financial services sectors.

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According to GuruFocus data, the CGM Focus Fund posted a -24.73% return in 2018. The S&P 500 returned -4.38%.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director 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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