To achieve long-term capital appreciation, the guru, who also manages the Chicago-based firm's Select and Global Select funds, usually invests in mid- and large-cap companies. When picking stocks, he looks for growing companies that have shareholder-oriented management teams. According to the fund's fact sheet, he prefers to take a position when the stock is trading at a substantial discount to his estimate of intrinsic value, then waits for the gap between the two to close before selling.
In his second-quarter commentary, Nygren revealed that after Occidental Petroleum (NYSE:OXY) acquired Anadarko Petroleum, the fund sold its 6.3 million-share stake "following an increase of over 50% for the quarter." He also said that due to a "significant decline in oil prices," the fund was able to replace Anadarko with three other exploration and production companies during the quarter: Diamondback Energy Inc. (NASDAQ:FANG), Concho Resources Inc. (NYSE:CXO) and EOG Resources Inc. (NYSE:EOG).
"U.S.-focused E&Ps have meaningfully improved their capital efficiency profile through the oil downturn," Nygren wrote. "We expect them to generate excess returns given their position at the low end of the global cost curve. All three of our new E&P holdings operate top-quality acreage in the premier U.S. onshore region (the Permian Basin), are led by returns-focused management teams and maintain strong balance sheets."
The guru invested in 1.7 million shares of Diamondback Energy, dedicating 1.12% of the equity portfolio to the stake. The stock traded for an average price of $104.45 per share during the quarter.
The Midland, Texas-based company, which produces oil and gas in the Permian Basin of West Texas, has a $16.32 billion market cap; its shares were trading around $99.98 on Thursday with a price-earnings ratio of 15.99, a price-book ratio of 1.18 and a price-sales ratio of 4.55.
The Peter Lynch chart shows the stock is trading near its fair value.
GuruFocus rated Diamondback's financial strength 4.7 out of 10. Although the company has issued approximately $2.9 billion in new long-term debt over the past three years, it is at a manageable level due to having adequate interest coverage. The Altman Z-Score of 1.63, however, warns the company is in financial distress and could be at risk of bankruptcy.
The company's profitability and growth fared better, scoring a 6 out of 10 rating on the back of operating margin expansion and a moderate Piotroski F-Score of 6, which suggests business conditions are stable.
With his purchase of 1.03% of outstanding shares, Nygren became Diamondback's largest guru shareholder. Ray Dalio (Trades, Portfolio), Leon Cooperman (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) also opened positions during the quarter, while Ken Fisher (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) added to their holdings. Leucadia National (Trades, Portfolio), David Carlson (Trades, Portfolio) and T Boone Pickens' (Trades, Portfolio) BP Capital also own the stock.
Nygren picked up 1.7 million shares of Concho Resources, allocating 1.06% of the equity portfolio to the stake. Shares traded for an average price of $107.94 during the quarter.
The oil and gas producer, which is also headquartered in Midland, Texas and operates in the Permian Basin, has a market cap of $14.73 billion; its shares were trading around $73.50 on Thursday with a price-earnings ratio of 28.96, a price-book ratio of 0.82 and a price-sales ratio of 3.20.
According to the Peter Lynch chart, the stock is overvalued.
Concho's financial strength was rated 4.7 out of 10 by GuruFocus. While the company has sufficient interest coverage, the Altman Z-Score of 1.60 warns it could be in danger of going bankrupt.
The company's profitability and growth scored a 4 out of 10 rating. Although Concho's margins and returns underperform over half of its competitors, it is supported by a moderate Piotroski F-Score of 4. The business predictability rank of one out of five stars is on watch as a result of declining revenue per share over the last five years. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.
Of the gurus invested in Concho, Dodge & Cox has the largest position with 3.03% of outstanding shares. The Signature Select Canadian Fund (Trades, Portfolio), Grantham and Ray Dalio (Trades, Portfolio) also established positions during the quarter, while NWQ Managers (Trades, Portfolio), Dodge & Cox and Pioneer added to their holdings. Pickens, Cohen, Ron Baron (Trades, Portfolio) and Leucadia National (Trades, Portfolio) are also shareholders.
The investor opened a 1.8 billion-share stake in EOG Resources, giving it 1.01% space in the equity portfolio. The stock traded for an average per-share price of $93.07 during the quarter.
The Houston-based oil and gas producer, which operates in the Permian Basin as well as the Eagle Ford and Bakken regions, has a $44.84 billion market cap; its shares were trading around $76.89 on Thursday with a price-earnings ratio of 12.54, a price-book ratio of 2.17 and a price-sales ratio of 3.70.
Based on the Peter Lynch chart, the stock appears to be undervalued.
GuruFocus rated EOG's financial strength 6.2 out of 10 on the back of comfortable interest coverage. In addition, the robust Altman Z-Score of 3.13 suggests the company is in good financial health.
The company's profitability and growth scored a 5 out of 10 rating, driven by strong margins and returns that outperform over half of industry peers and a high Piotroski F-Score of 8, which suggests operating conditions are healthy. Despite recording a decline in revenue per share over the last five years, EOG has a one-star business predictability rank.
Investment firm Barrow, Hanley, Mewhinney & Strauss is the company's largest guru shareholder with 2.11% of outstanding shares. Grantham also established a position during the quarter, while Dalio, Fisher, Pioneer and John Rogers (Trades, Portfolio) added to their holdings. Other guru investors are PRIMECAP Management (Trades, Portfolio), Jim Simons' (Trades, Portfolio) Renaissance Technologies, Cohen and Paul Tudor Jones (Trades, Portfolio).
During the quarter, Nygren also added to his holdings of Constellation Brands Inc. (NYSE:STZ), Regeneron Pharmaceuticals Inc. (NASDAQ:REGN), Chesapeake Energy Corp. (NYSE:CHK) and Capital One Financial Corp. (NYSE:COF).
The guru's $16.6 billion equity portfolio, which is composed of 52 stocks, is heavily invested in the financial services sector, followed by smaller holdings in the consumer cyclical and technology sectors. Energy stocks make up a mere 6.54% of the overall equity portfolio.
According to GuruFocus data, the Oakmark Fund underperformed the S&P 500 Index in 2018 with a return of -12.73%. The index posted a -4.38% return.
Disclosure: No positions.
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This article first appeared on GuruFocus.
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