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Chuck Akre's Firm's Biggest 4th-Quarter Buys

Chuck Akre (Trades, Portfolio)'s Akre Capital Management recently disclosed its fourth-quarter 2019 portfolio updates.

Akre founded Akre Capital Management in 1989 and currently serves as the chairman and chief investment officer of the firm. Headquartered in Middleburg, Virginia, the firm invests in a small number of quality businesses run by good managers who reinvest their free cash flow wisely. These are the three components that make up Akre's "three-legged stool" investment philosophy, which the firm is known for sticking closely to.


As of the quarter's end, the equity portfolio consisted of 25 stocks valued at $10.91 billion.

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The firm's top holdings were American Tower Corp. (AMT) at 15.14%, Mastercard Inc. (MA) at 14.59% and Moody's Corp. (MCO) at 12.39%. In terms of sector weighting, the firm was mostly invested in financial services, real estate and consumer cyclical.

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Akre established new holdings in CoStar Group Inc. (NASDAQ:CSGP) and Ansys Inc. (NASDAQ:ANSS) during the quarter and made significant additions to existing investments in Brookfield Asset Management Inc. (NYSE:BAM) and CarMax Inc. (NYSE:KMX).

CoStar Group

Akre's biggest new buy for the fourth quarter was for 250,000 shares of CoStar Group. The trade had a 1.37% impact on the equity portfolio. Shares traded at an average price of $584.40 over the observed period.

CoStar Group is the company that many consider to be the number one commercial real estate information company. The Washington, D.C.-based company provides information, analytics and marketing services to commercial properties in the U.S. and several other countries.

On Feb. 17, shares of CoStar traded around $731.37 for a market cap of $26.79 billion and a price-earning ratio of 84.04. The company has reported steady gains in revenue and net income over the years.

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GuruFocus has assigned CoStar a financial strength rating of 9 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 9.58 and interest coverage of 130.2% are outperforming 82.28% of competitors, while the return on capital of 251.88% is impressive for any industry.

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As the most trusted real estate data vendor in the U.S., CoStar has a significant economic moat that continues to grow as it expands into other avenues of data collection and distribution. Its 2014 acquisition of Apartments.com has been a high contributor to revenue growth. More recently, it acquired STR Inc., a research company that tracks supply and demand for multiple sectors, including the global hotel and tourism industries.

Ansys

After selling out of a previous holding in Ansys in the third quarter of 2016, the firm established a new position in the company of 163,740 shares, impacting the equity portfolio by 0.39%. During the quarter, the stock traded at an average price of $237.46.

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Ansys develops and sells multiphysics engineering simulation software for purposes such as product design, testing and operation. The Canonsburg, Pennsylvania-based company provides design platform solutions for a wide range of industries, including tech, construction, energy, health care and aerospace, among others.

On Feb. 17, Ansys shares traded around $291.98 for a market cap of $24.96 billion and a price-earnings ratio of 57.03. The company has seen consistent strong growth in its revenue and net income.

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Ansys has a GuruFocus financial strength score of 7 out of 10 and a profitability score of 10 out of 10. The cash-debt ratio of 6.99 is higher than 63.51% of competitors.

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Ansys is already an established leader in the engineering simulation space, but the industry as a whole is expected to grow by 15% per year over the next five years, meaning that it still has potential to grow its subscriber base. The order backlog continues to grow, shooting up 19% year over year to $650.4 million as of the end of the third quarter of 2019. Since Ansys sells software, the backlog mainly represents long-term subscriptions (deferred revenue) and large contracts.

Brookfield Asset Management

The guru boosted the Brookfield Asset Management position by 925,775 shares, or 17.39%, bringing the total number of shares owned up to 6,250,000. The trade had a 0.49% impact on the equity portfolio. Shares traded at an average price of $56 during the quarter.

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Brookfield is an alternative asset manager that takes a long-term investment approach toward high-quality assets and business in more than 30 countries worldwide. Its asset investments are primarily centered on commercial real estate, infrastructure and power plants, with a focus on reinvesting capital to improve asset quality.

On Feb. 17, Brookfield's shares traded around $67.96 apiece for a market cap of $71.22 billion and a price-earnings ratio of 26.26. According to the Peter Lynch chart, the stock is overvalued.

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Brookfield has a GuruFocus financial strength score of 3 out of 10 and a profitability score of 8 out of 10. The cash-debt ratio of 0.05, interest coverage of 1.41% and Altman Z-score of 0.74 are ranked lower than 93.36% of competitors. The 15.07% operating margin is average for the industry, while the three-year revenue growth rate of 40.8% is promising.

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The asset manager operates on high leverage, racking up debt in order to rapidly increase revenue. At the end of 2019, Brookfield had $143.3 billion in debt compared to net income for the year of $5.4 billion and cash on hand of $6.8 billion. Assets under management have grown to $545 billion in value, while fee-bearing capital is at $290 billion.

CarMax

Akre invested in an additional 462,300 shares of CarMax, boosting the position by 7.36% and bringing the total number of shares owned up to 6,747,651. The trade had a 0.37% impact on the equity portfolio. During the quarter, shares traded at an average price of $94.14.

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Headquartered in Richmond, Virginia, CarMax is a used-car company with approximately 195 stores across the U.S. It offers upfront prices, nationwide availability and online shopping.

On Feb. 17, CarMax shares traded around $98.81 for a market cap of $16.14 billion and a price-earnings ratio of 19.15. The Peter Lynch chart estimates that the stock is trading near its fair value.

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GuruFocus has given CarMax a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The Altman Z-core of 2.02 is nearly in the distress zone, but the interest coverage of 9.36% is around the industry average. The company has a three-year revenue growth rate of 11.9% and a three-year Ebitda growth rate of 10.6%.

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As the most-recognized used car retailer in the U.S., CarMax has seen increased success after entering the online used car market.

"We remain excited about the unique and powerful experience we are providing through omni-channel, which is empowering customers to shop on their terms, whenever and wherever it is most convenient for them. Our ability to seamlessly integrate our physical and digital experiences while continuing to drive comparable store sales growth, maintain an attractive used vehicle gross profit per unit, and deliver our exceptional customer service is a key differentiator," President and CEO Bill Nash said in regard to the results for the company's 2019 third quarter.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.