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John Rogers Adds 6 Stocks to Portfolio in 4th Quarter

Ariel Investments leader John Rogers (Trades, Portfolio) released his firm's fourth-quarter 2019 portfolio last week, listing six new holdings.

The guru's Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.


Based on these criteria, the firm established positions in Carnival Corp. (NYSE:CCL), Evercore Inc. (NYSE:EVR), the iShares Russell 2000 ETF (IWM), Zagg Inc. (NASDAQ:ZAGG), InterDigital Inc. (NASDAQ:IDCC) and GlassBridge Enterprises Inc. (GLAE) during the quarter.

Carnival

Having previously exited a position in Carnival in the fourth quarter of 2013, Ariel entered a new 621,390-share holding, allocating 0.40% of the equity portfolio to it. The stock traded for an average price of $44.81 per share during the quarter.

The Miami-based company, which operates several cruise lines, has a $30.258 billion market cap; its shares were trading around $42.77 on Tuesday with a price-earnings ratio of 9.86, a price-book ratio of 1.15 and a price-sales ratio of 1.42.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 10 out of 10, along with price ratios near multiyear lows, also supports undervaluation.

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GuruFocus rated Carnival's financial strength 5 out of 10. Although the company has issued approximately $2 billion in new long-term debt over the past three years, it is still at a manageable level due to adequate interest coverage. The Altman Z-Score of 2.26, however, indicates the company is under some financial pressure.

The company's profitability scored an 8 out of 10 rating on the back of operating margin expansion, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 5, which implies business conditions are stable. Carnival also has a business predictability rank of one out of five stars. According to GuruFocus, 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 Carnival, PRIMECAP Management (Trades, Portfolio) has the largest stake with 3.10% of outstanding shares. Other top guru shareholders are Jim Simons (Trades, Portfolio)' Renaissance Technologies, Leon Cooperman (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Tweedy Browne (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Scott Black (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Ron Baron (Trades, Portfolio).

Evercore

The firm invested in 48,700 shares of Evercore, dedicating 0.05% of the equity portfolio to the position. During the quarter, the stock traded for an average price of $76.23 per share.

The investment bank, which is headquartered in New York, has a market cap of $3.14 billion; its shares were trading around $80.23 on Tuesday with a price-earnings ratio of 11.68, a price-book ratio of 4.15 and a price-sales ratio of 1.66.

According to the Peter Lynch chart, the stock is undervalued. The valuation rank of 10 out of 10 also indicates undervaluation since the company's price-book and price-sales ratios are at one-year lows.

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Evercore's financial strength was rated 3 out of 10 by GuruFocus on the back of low debt ratios.

The company's profitability scored a 5 out of 10 rating on the back of margins and returns that outperform over half of its industry peers. It also has a one-star business predictability rank.

With 2.96% of outstanding shares, Hotchkis & Wiley is Evercore's largest guru shareholder. Steven Cohen (Trades, Portfolio), Simons' firm, Chuck Royce (Trades, Portfolio), Pioneer, George Soros (Trades, Portfolio), Fisher, Greenblatt, Caxton Associates (Trades, Portfolio) and Jones also have positions in the stock.

IShares Russell 2000

The guru's firm also established a 23,900-unit holding in the iShares Russell 2000 exchange-traded fund, expanding the equity portfolio by 0.05%. The units were trading around $157.75 each during the quarter. The firm previously closed a position in the ETF in the first quarter of 2018.

The ETF, which tracks the investment performance of an index of small-cap U.S. stocks, has a $45.17 billion market cap; the units were trading around $167.70 on Tuesday with a price-earnings ratio of 18 and a price-book ratio of 2.12.

The 14-day relative strength index of 57.2 indicates the ETF is neither overbought nor oversold.

Zagg

Rogers' firm picked up 362,275 shares of Zagg, giving the holding 0.04% space in the equity portfolio. The stock traded for an average per-share price of $7.46 during the quarter.

The Midvale, Utah-based consumer electronics company has a $243.45 million market cap; its shares were trading around $8.17 on Tuesday with a price-earnings ratio of 59.79, a price-book ratio of 1.51 and a price-sales ratio of 0.48.

Based on the Peter Lynch chart, the stock appears to be overvalued. Its valuation rank of 7 out of 10, however, leans toward undervaluation.

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GuruFocus rated Zagg's financial strength 4 out of 10 on the back of $59.3 million in new long-term debt and low interest coverage. In addition, the Altman Z-Score of 2.34 suggests it is under some financial pressure. The company's weighted average cost of capital also outperforms its return on invested capital, indicating it is not capital efficient.

The company's profitability fared a bit better, scoring an 8 out of 10 rating, despite having declining margins and returns that underperform a majority of competitors. Zagg is also supported by a low Piotroski F-Score of 3, which implies poor operating conditions. Its one-star business predictability rank is on watch as a result of declining revenue per share over the past year.

Hothckis & Wiley is the company's largest guru shareholder with 3.23% of outstanding shares. Jeremy Grantham (Trades, Portfolio) also has a position in the stock.

InterDigital

After closing out of a position in InterDigital in the fourth quarter of 2017, Ariel opened a new 30,199-share holding. The trade had an impact of 0.02% on the equity portfolio. Shares traded for an average price of $55.32 each during the quarter.

The mobile technology research and development company, which is headquartered in Wilmington, Delaware, has a market cap of $1.79 billion; its shares were trading around $57.34 on Tuesday with a price-earnings ratio of 213.04, a price-book ratio of 2.29 and a price-sales ratio of 6.4.

The Peter Lynch chart suggests the stock is overvalued. Similarly, the GuruFocus valuation rank of 1 out of 10 supports this assessment as the price-earnings ratio is near a 10-year high.

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InterDigital's financial strength was rated 5 out of 10 by GuruFocus. Despite having a good cash-debt ratio of 2.16, the company has poor interest coverage. The Altman Z-Score of 3.29 suggests it is in good standing financially. Since its ROIC is less than its WACC, however, it may not be capital efficient.

The company's profitability fared much better with a 9 out of 10 rating. While InterDigital's margins and returns on equity and assets underperform over half of its industry peers, its return on capital outperforms a majority of competitors. It is also supported by a moderate Piotroski F-Score of 4 and a two-star business predictability rank, which is on watch as a result of declining revenue per share over the past three years. GuruFocus says companies with this rank typically see their stocks gain an average of 6% per year.

Of the gurus invested in InterDigital, Simons' firm has the largest stake with 3.97% of outstanding shares. Other top guru shareholders are First Pacific Advisors (Trades, Portfolio), the FPA Capital Fund (Trades, Portfolio), Jones, Pioneer, Caxton, Greenblatt and Royce.

GlassBridge Enterprises

Having divested of a holding in GlassBridge in the third quarter of 2019, the firm entered a new 3,883-share position. The trade impacted the equity portfolio by 0.01%. During the quarter, the stock traded for an average price of $179.34 per share.

The Oakdale, Minnesota-based investment management company has a $6.29 million market cap; its shares were trading around $250 on Tuesday with a price-earnings ratio of 0.75 and a price-sales ratio of 65.

According to the Peter Lynch chart, the stock is significantly undervalued despite the share price and price-sales ratios being near multiyear highs.

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GuruFocus rated GlassBridge's financial strength 6 out of 10, driven by no long-term debt and comfortable interest coverage. The Altman Z-Score of -175.39, however, warns that the company is in financial distress and could be at risk of going bankrupt. Its Sloan ratio also suggests it has poor earnings quality.

The company's profitability did not fare as well, scoring a 2 out of 10 rating on the back of an operating margin and return on capital that underperform a majority of industry peers. In contrast, its net margin and return on assets outperform a majority of competitors. GlassBridge has a moderate Piotroski F-Score of 5. Despite recording a decline in revenue per share over the past three years, it also has a one-star business predictability rank.

Rogers' firm holds 19.42% of the company's outstanding shares.

Additional trades and portfolio performance

During the quarter, Ariel also added to a number of holdings, including ViacomCBS Inc. (NASDAQ:VIAC), Nielsen Holdings PLC (NYSE:NLSN), Adtalem Global Education Inc. (NYSE:ATGE), National Oilwell Varco Inc. (NYSE:NOV) and Snap-on Inc. (NYSE:SNA), among others.

The firm's $7.97 billion equity portfolio, which is composed of 146 stocks, is largely invested in the financial services, industrials and communication services sectors.

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According to the firm's website, the Ariel Fund posted a 24.67% return in 2019. The S&P 500 returned 31.49%.

Disclosure: No positions.

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This article first appeared on GuruFocus.