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Diamond Hill Capital's Most Promising 3rd-Quarter Buys

Earlier this week, Diamond Hill Capital (Trades, Portfolio) disclosed its portfolio updates for the third quarter of 2019. Major new positions include Fidelity National Information Services Inc. (NYSE:FIS), Charles Schwab Corp. (NYSE:SCHW) and Archer-Daniels Midland Co. (NYSE:ADM). The fund's biggest sells include Worldpay Inc. (NYSE:WP), PNC Financial Services Group Inc (NYSE:PNC), T-Mobile US Inc (NASDAQ:TMUS) and VF Corp. (VF).


Founded in 2000 and headquartered in Columbus, Ohio, Diamond Hill Capital (Trades, Portfolio) identifies itself as an independent investment management firm that seeks to align employee interests with investor interests by investing in the same portfolios. Its strategy is to maintain a long-term focus based on fundamental, ground-up analysis of a company's intrinsic value, as determined by factors such as market position, competition, management, valuation and growth prospects. The fund focuses on buying undervalued companies that have a solid and proven foundation for revenue production.

As of the quarter's end, Diamond Hill's equity portfolio is valued at $18.81 billion. In total, it has eight new holdings and 12 sellouts from the quarter, putting the number of stocks owned at 162, though half of these changes impacted the portfolio by less than 0.01%. Diamond Hill's largest sectors in terms of weight are financial services (28.2%), consumer cyclical (15.92%) and industrials (13.08%).

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Fidelity National Information Services

This quarter, the fund's largest purchase was 1,841,042 shares of Fidelity National Information Services, which gives it a weight of 1.3% in the equity portfolio. The stock was trading at an average price of $132.74 per share during the quarter.

Fidelity National Information Services is a business services company that creates payment and commerce solutions for merchants, banks and capital markets. Headquartered in Jacksonville, Florida, the company has processed over $75 billion in transactions and offers over 450 solutions for banking, paying and investing. It has a market cap of $81.76 billion and an enterprise value of $90.25 billion.

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The share price has dropped recently, from a high of $141.23 in late August to about $131.92 at the beginning of November. GuruFocus has granted the company a financial strength score of 5 out of 10 and a profitability score of 8 out of 10. It has a price-earnings ratio of 57.96, a price-book ratio of 5.21, an operating margin of 19.14% and an Altman Z-score of 3.01. The company's three-year revenue growth rate has slowed to 3.6% and its revenue declined in 2017 and 2018, which, together with faster asset growth than revenue growth, may account for its recent price drop.

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Charles Schwab

The fund bought 3,446,873 shares of Charles Schwab, giving it a weight of 0.77% in the equity portfolio. Throughout the quarter, the stock traded at an average price of $40.33 per share, which is almost double the $23.85 price at which Diamond Hill sold out of the company back in the fourth quarter of 2014.

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Charles Schwab is a well-known investment company that offers a wide range of products, from mutual funds and bonds to options and futures. Approximately 1.7 million people participate in its corporate retirement plan, and the total amount of client money invested in its proprietary mutual funds and exchange-traded funds currently exceeds $450.2 billion. It has a market cap of $54.38 billion and an enterprise value of -$14.25 billion (negative enterprise values are often referred to as "getting money for nothing," since it means that the stock is trading at a lower value than the net cash on the company's balance sheet).

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Charles Schwab's shares have been on the decline since 2018, providing a good buying opportunity. According to the Peter Lynch chart, the stock has recently become undervalued.

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The company has a GuruFocus financial strength rating of 4 out of 10 and a profitability score of 5 out of 10. Its main attractions include a price-earnings ratio of 15.56, no debt and a three-year revenue growth rate of 15.7%, which represents steady growth in recent years.

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Archer-Daniels Midland

Diamond Hill also bought 2,444,035 shares of Archer-Daniels Midland, giving it an equity portfolio weight of 0.53%. The stock traded at an average price of $39.81 during the quarter.

Originally started as a linseed crushing business in 1902, Archer-Daniels has grown into one of the largest agricultural processors in the world. It has operations in over 200 countries, which process agricultural products into food and beverages, industrial products, fuel and animal food. It has a market cap of $23.48 billion and an enterprise value of $32.07 billion.

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Recently, shares of Archer-Daniels have dropped to $42.20 per share due to its revenue declining between 2014 and 2018. However, fiscal 2019 has brought the company an increase in revenue again, improving the stock price's prospects.

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Archer-Daniels has a GuruFocus financial strength score of 5 out of 10 and a profitability score of 5 out of 10. It has a price-earnings ratio of 18.29, a price-book ratio of 1.25, an operating margin of 2.62% and an Altman Z-score of 3.03. Though the company has faced notable headwinds this year, partially due to higher corn prices and an unfavorable margin environment in the ethanol industry, it finished the third quarter strong with adjusted earnings of 77 cents per share and total revenue of $16.297 billion, which beats the previous four quarters.

Disclosure: Author owns no shares in any of the stocks mentioned.

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This article first appeared on GuruFocus.