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Donald Smith Trims Photronics, Beazer Homes Positions

- By Sydnee Gatewood

Donald Smith (Trades, Portfolio), leader of Donald Smith & Co., disclosed that he trimmed his holdings of Photronics Inc. (PLAB) and Beazer Homes USA Inc. (BZH) on March 25.


Favoring unpopular companies trading at a discount to tangible book value, the guru's New York-based firm picks stocks using a deep-value, bottom-up approach. It looks for companies that are in the bottom docile of price-tangible book ratios and have a positive earnings outlook for the next two to four years.

Photronics

According to GuruFocus Real-Time Picks, a Premium feature, Smith slashed his Photronics stake by 34.87%, selling 1.25 million shares for an average price of $9.25 per share. He now holds 2.35 million shares, which represent 1.29% of his equity portfolio.

GuruFocus estimates Smith has gained 35% on the investment since the second quarter of 2010.

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The Brookfield, Connecticut-based company, which manufactures semiconductor photomasks, has a $615.53 million market cap; its shares were trading around $9.18 on Wednesday with a price-earnings ratio of 15.58, a price-book ratio of 0.83 and a price-sales ratio of 1.26.

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

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The company, which celebrated 50 years in business earlier this month, reported its first-quarter 2019 results on Feb. 21. Photronics posted earnings of 8 cents per share. Revenue grew 1% year-over-year to $124.7 million.

Photronics' financial strength and profitability and growth were both rated 7 out of 10 by GuruFocus. Although the company has good interest coverage and cash-debt ratio, the Altman Z-Score of 2.81 indicates it is under some fiscal pressure.

Although the operating margin is expanding, the company's returns underperform competitors. Photronics is also supported by a high Piotroski F-Score of 8, which indicates operating conditions are healthy, and a business predictability rank of one out of five stars. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.

Of the gurus invested in Photronics, Barrow, Hanley, Mewhinney & Strauss has the largest position with 5.94% of outstanding shares. Other shareholders are Jim Simons (Trades, Portfolio)' Renaissance Technologies, Chuck Royce (Trades, Portfolio), Hotchkis & Wiley, Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).

Beazer Homes

The guru curbed his Beazer Homes stake by 11.05%, selling 373,028 shares for an average price of $11.66 per share. He now holds 3 million shares, accounting for 1.18% of the equity portfolio.

According to GuruFocus, Smith has lost an estimated 27% on the investment since fourth-quarter 2017.

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The homebuilder, which is headquartered in Atlanta, has a $378.57 million market cap; its shares were trading around $11.78 on Wednesday with a price-earnings ratio of 4.10, a price-book ratio of 0.61 and a price-sales ratio of 0.18.

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

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On Feb. 4, the company reported its results for the first quarter of 2019. It posted earnings of 23 cents per share on $401 million in homebuilding revenue, which grew 9% from the prior-year quarter.

GuruFocus rated Beazer's financial strength 4 out of 10. Weighed down by a low cash-debt ratio of 0.07, the Altman Z-Score of 2.06 suggests the company is under some financial pressure.

The company's profitability and growth fared much better, scoring a 7 out of 10 rating as a result of operating margin expansion, a moderate Piotroski F-Score of 6, which suggests conditions are stable, and a one-star business predictability rank. Returns, however, are underperforming industry peers.

With 10.50% of outstanding shares, Smith is the company's largest guru shareholder. Other top investors are Royce, Charles Brandes (Trades, Portfolio) and Simons' firm.

Portfolio

Smith's $2.72 billion equity portfolio, which is composed of 61 stocks as of fourth-quarter 2018, is largely invested in the industrials and financial services sectors.

His five largest holdings as of the fourth quarter were AerCap Holdings NV (AER), Air France-KLM (AFLYY), Micron Technology Inc. (MU), Unum Group (UNM) and Kinross Gold Corp. (KGC).

Disclosure: No positions.

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This article first appeared on GuruFocus.