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Smead Value Fund Focuses on Cyclicals in 3rd Quarter

The Smead Value Fund (Trades, Portfolio) recently disclosed its portfolio updates for the quarter ended Aug. 31. During the quarter, the company sold out of its positions in Schlumberger Ltd. (NYSE:SLB) and Johnson & Johnson (NYSE:JNJ) and established new positions in Occidental Petroleum Corp. (NYSE:OXY) and Macerich Co. (NYSE:MAC).


The Smead Value Fund's investing strategy is based on large-cap stocks that are evaluated based on the following eight criteria: meet an economic need, have a strong competitive advantage, have a long history of profitability and strong operating metrics, generate high levels of free chase flow, are undervalued, have a strong balance sheet, show insider ownership and have a history of friendly relations between management and shareholders.

As of the end of the quarter, the fund's portfolio is valued at $1.17 billion and holds 27 stocks. In terms of sector weighting, the fund is primarily invested in consumer cyclicals (32.02%), financial services (27.18%) and health care (15.05%).

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Occidental Petroleum

Fitting in with its preference for cyclicals, the fund bought 847,946 shares of Occidental Petroleum. Shares traded at an average price of $48.61 during the quarter.

Occidental is an oil and gas exploration and production company with facilities in the U.S., the Middle East, Latin America and Africa. Among major fossil fuel producers, Occidental ranks number one in terms of CO2 EOR (carbon sequestration and reuse) projects. Recently, the company acquired Andarko Petroleum Corp. for $55 billion. It now has a market cap of $39.56 billion and an enterprise value of $48.78 billion.

Occidental has a GuruFocus financial strength score of 5 out of 10 and a profitability score of 7 out of 10. The company has a price-earnings ratio of 8.79 (lower than 82.01% of industry competitors), a price-book ratio of 1.55, an operating margin of 25.66% and an interest coverage of 10.59. According to the Peter Lynch chart, the company may have recently reached undervalued territory.

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Occidental has a current dividend yield of 7.04%, higher than 63.79% of competitors, and a dividend payout ratio of 0.62. Its three-year dividend growth rate is 1.4% and it has a three-year average share buyback ratio of 0.4.

The current share price is lower than it has been since 2006, but the oil and gas company's earnings have been increasing ever since a sharp drop to the negative net income range in 2016. Analysts expect revenue of $5.55 billion for the third quarter, compared to $4.42 billion for the second quarter. Given the stock's low current valuation, meeting or exceeding analyst expectations on quarterly revenue might see a decent recovery in price.

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Macerich

The fund bought 758,106 shares of Macerich, impacting the equity portfolio by 1.84%. During the quarter, the stock traded for an average price of $32.44 per share.

Macerich is a U.S. premier real estate investment trust that deals in affluent, densely populated areas that often have strong international appeal. It markets itself as being focused on social responsibility and sustainability, with high numbers of employee volunteer hours and four LEED Gold properties (properties that have achieved 60 to 79 sustainability points according to the LEED green building certification requirements). The company has a market cap of $4.15 billion and an enterprise value of $9.81 billion.

GuruFocus has assigned Macerich a financial strength score of 3 out of 10 and a profitability score of 7 out of 10. The company has a price-earnings ratio of 38.74, a price-book ratio of 1.49 and an operating margin of 23.91%. It has been in a revenue decline for the past three years and seems to be in some financial difficulty, with a cash-debt ratio of 0.02, interest coverage of 1.35 and an Altman-Z score of 0.32.

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Macerich offers an appealing dividend yield of 10.19%, which tops 90.79% of industry competitors. Its dividend payout ratio is 5.26, and it has a three-year dividend growth rate of 4.1% and a three-year average share buyback ratio of 3.8.

The REIT posted third-quarter results that beat analyst expectations by a long shot. The company's net income totaled $46.37 million, or 33 cents in earnings per share, while analysts were expecting earnings of 8 cents per share. Revenue fell to $231.13 million from last year's third-quarter revenue of $242.20 million. According to the Peter Lynch chart, the stock may still be overvalued.

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

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This article first appeared on GuruFocus.