Known for its activist investments, the San Francisco-based firm concentrates on acquiring significant ownership stakes in a handful of companies it believes are fundamentally undervalued. The investment team seeks out-of-favor companies that are mispriced for a specific reason; ValueAct then works productively with management to maximize shareholder value. Ubben stepped down as chief investment officer in July 2017, handing the reins to his protege, Mason Morfit. He remains at the firm as CEO.
Based on these criteria, ValueAct established positions in LKQ Corp. (NASDAQ:LKQ) and PG&E Corp. (NYSE:PCG) during the quarter.
Ubben's firm invested in 16.03 billion shares of LKQ, allocating 5.44% of the equity portfolio to the stake. The stock traded for an average price of $27.34 per share during the quarter.
The Chicago-based company, which produces alternative and specialty auto parts, has a $10.69 billion market cap; its shares were trading around $35.13 on Tuesday with a price-earnings ratio of 24.73, a price-book ratio of 2.22 and a price-sales ratio of 0.87.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
In a filing with the Securities and Exchange Commission, ValueAct noted that it plans to have discussions with LKQ's management "relating to the business of the Issuer, management, board composition (which include whether it makes sense for a ValueAct Capital employee to be on the Issuer's board of directors), investor communications, operations, capital allocation, dividend policy, financial condition, mergers and acquisitions strategy, overall business strategy, executive compensation and corporate governance."
GuruFocus rated LKQ's financial strength 5 out of 10. Although the company has adequate interest coverage, the Altman Z-Score of 2.8 indicates it is under some financial pressure.
The company's profitability fared even better, scoring a 9 out of 10 rating on the back of margins and returns that outperform over half of its competitors and a moderate Piotroski F-Score of 6, which implies operating conditions are stable. LKQ also has a perfect business predictability rank of five out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 12.1% per annum over a 10-year period.
With its purchase of 5.23% of outstanding shars, ValueAct is now the company's largest guru shareholder. Charles de Vaulx (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies also own the stock.
ValueAct picked up 1.44 million shares of PG&E, dedicating 0.16% of the equity portfolio to the position. During the quarter, shares traded for an average price of $15.16.
The utility company, which is headquartered in San Francisco, has a market cap of $3.72 billion; its shares were trading around $7.03 on Tuesday with a forward price-earnings ratio of 1.59, a price-book ratio of 0.46 and a price-sales ratio of 0.22.
According to the median price-sales chart, the stock is undervalued.
The company is struggling to recover from bankruptcy following the fallout from its involvement in the California wildfires last year. In March, Ubben criticized PG&E for delaying its board nomination process as it worked to negotiate with competing shareholder groups and defend itself in court from a slew of lawsuits.
PG&E's financial strength was rated 4 out of 10 by GuruFocus. As a result of issuing approximately $5.5 billion in new long-term debt over the past three years, the company has weak interest coverage. In addition, the utility is being crippled by a low Altman Z-Score of -0.36, which indicates it is in financial distress.
The company's profitability fared better with a score of 6 out of 10, driven by operating margin expansion and a moderate Piotroski F-Score of 4. PG&E's one-star business predictability rank is on watch as a result of recording a decline in 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 year.
Of the gurus invested in PG&E, David Abrams (Trades, Portfolio) has the largest position with 4.72% of outstanding shares. Seth Klarman (Trades, Portfolio), David Tepper (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Steven Romick (Trades, Portfolio), John Paulson (Trades, Portfolio), Howard Marks (Trades, Portfolio), Alan Fournier (Trades, Portfolio), Michael Price (Trades, Portfolio), Jones and Pioneer are also shareholders.
Additional trades and portfolio composition
During the quarter, Ubben's firm also increased its positions in Strategic Education Inc. (NASDAQ:STRA), Hawaiian Electric Industries Inc. (NYSE:HE), Enviva Partners LP (NYSE:EVA), Trinity Solutions Inc. (NYSE:TRN), Darling Ingredients Inc. (NYSE:DAR), The AES Corp. (NYSE:AES) and Unifi Inc. (NYSE:UFI).
Over half of ValueAct's $9.27 billion equity portfolio, which is composed of 22 stocks, is invested in the financial services sector.
Disclosure: No positions.
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This article first appeared on GuruFocus.