Bill Nygren's 2nd Quarter Oakmark Select Fund Commentary
- By Holly LaFon
The Oakmark Select Fund was up 3% for the quarter, ahead of the S&P 500's 2% return. Three quarters into our fiscal 2016, the Oakmark Select Fund increased by 4% compared to an 11% gain for the S&P 500.
Our best performers in the quarter, both up more than 60%, were LinkedIn and Chesapeake Energy (CHK) bonds. Our biggest detractors to performance were Fiat (FCAM) convertible bonds, down 18%, and Alphabet (GOOGL), down 7%; we continue to believe both companies trade at significant discounts to their intrinsic values. From a sector-weight standpoint, our large position in technology stocks hurt returns this quarter, as did our underweight position in health care. The details of our LinkedIn investment are discussed elsewhere in the Oakmark Fund and Oakmark Global Fund letters this quarter; suffice it to say that take-outs of our portfolio companies at close to fair value are always welcome. The Chesapeake Energy position, however, deserves a more comprehensive discussion.
Warning! GuruFocus has detected 3 Warning Signs with CHK. Click here to check it out.
The intrinsic value of CHK
Earlier in 2016, investors were pricing in significant bankruptcy risk across Chesapeake's capital structure. At the time, we believed Chesapeake's liquidity risks were manageable given the company's ability to sell assets representing a small percentage of its future production in exchange for cash, making up a meaningful percentage of the company's enterprise value. We felt that Chesapeake's bonds at the time had a similar upside to the stock and had the added benefit of higher seniority in the capital structure, so we swapped the preponderance of our Chesapeake equity position into the company's fixed income securities. On average over the months in which we executed this trade, we sold CHK stock for approximately $4 per share and bought bonds trading for $48.
Commodity prices rose during the quarter, while Chesapeake sold assets for cash without substantially reducing its current EBITDA. We believe that the liquidity profile of the company is now considerably improved. Today the bonds are trading for $85 while the stock is at $4.28, and the relative attractiveness of Chesapeake bonds to its stock has noticeably narrowed. We are very impressed with how well Chesapeake's management team and board of directors have navigated this challenging commodity price environment, and we remain positive about the long-term prospects for this company.
During the quarter we added two new positions to the Fund, Harley-Davidson and the aforementioned LinkedIn. Harley-Davidson (HOG) is one of America's great brands, yet at 11x 2016 earnings per share, it is priced as if it's a distressed retailer. The company's new CEO has increased product development and marketing spending, seeking to provide long-term benefits at the expense of current margins, and is expanding into markets such as China, India and Vietnam with encouraging early results. A pervasive concern cited about Harley-Davidson is the aging of its core Baby Boomer rider base, but motorcycle ownership amongst people ages 25-50 today is as high per capita as it was when Boomers were in that demographic. We believe the long-term future of this company is bright and that the current price of the stock will prove a bargain.
We eliminated positions in Calpine (CPN) and Monsanto (MON). Both companies' fundamental results had persistently and materially underperformed our expectations. We of course prefer to sell things because they rise to our expected values, but sometime events unfold in a way that causes us to lose confidence in our original thesis. Both of these sales fall into the latter category. Monsanto is currently involved in takeover negotiations with Bayer, which, if successful, could make our sale look foolish in hindsight.
Thank you, our fellow shareholders, for your continued investment in our Fund.
William C. Nygren, CFA
Portfolio Manager
Anthony P. Coniaris, CFA
Portfolio Manager
Win Murray
Portfolio Manager
The discussion of the Fund's investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund's investments and the views of the portfolio managers and Harris Associates L.P., the Fund's investment adviser, at the time of this letter, and are subject to change without notice.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Signs with CHK. Click here to check it out.
The intrinsic value of CHK
