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Smead Value Fund's Biggest 4th-Quarter Trades

The Smead Value Fund (Trades, Portfolio) recently disclosed its portfolio updates for the fourth quarter of 2019. During the quarter, the fund sold out of its position in AmerisourceBergen Corp. (NYSE:ABC), reduced its holdings of Aflac Inc. (NYSE:AFL) and NVR Inc. (NYSE:NVR) and added to its holdings in several companies, most notably Occidental Petroleum Corp. (NYSE:OXY) and Macerich Co. (NYSE:MAC).

The fund's investing strategy is based on large-cap stocks that 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 quarter's end, the equity portfolio was valued at $1.29 billion.


The Smead Value Fund (Trades, Portfolio)'s top holdings are Target Corp. (TGT) at 7.49%, NVR at 7.16% and Amgen Inc. (AMGN) at 6.70%. In terms of sector weighting, it is most heavily invested in financial services, consumer cyclical and health care.


AmerisourceBergen Corp

The Smead Value Fund (Trades, Portfolio) sold out of its 292,408-share position in AmerisourceBergen, impacting the equity portfolio by 2.05%. Shares were trading at an average price of $85.19 apiece during the quarter.


AmerisourceBergen is a drug wholesale company based in Chesterbrook, Pennsylvania. Its focus is on distributing pharmaceuticals to their final destinations and improving supply chain efficiency.

As of Feb. 6, the company has a market cap of $19.1 billion, a price-earnings ratio of 30.05, a cash-debt ratio of 0.78 and a return on capital of 54.49%. According to the Peter Lynch chart, the stock is trading slightly above its fair value.


While the company has seen strong revenue growth in recent years, it has an operating margin of 1.06% and a net margin of 0.36%, both of which are low even for the medical distribution industry. This has resulted in average net income remaining around the same levels. Since combination of stagnant profitability growth and a high earnings multiple may be a bad sign for the future of the stock's price.


AmerisourceBergen announced earlier this month that it will be closing one of its locations that produces compounded sterile preparations, which it paid $2.6 billion to buy five years ago. The closure will cut 1,000 jobs.

Occidental Petroleum

The fund upped its stake in Occidental Petroleum by 61.15% to a total of 1,366,495 shares, impacting the equity portfolio by 1.55%. During the quarter, shares were trading at an average price of $42.09.


Occidental is an oil and gas exploration and production company with facilities in the United States, the Middle East, Latin America and Africa. Among major fossil fuel producers, Occidental ranks first in terms of CO2 EOR (carbon sequestration and reuse) projects.

As of Feb. 6, Occidental has a market cap of $37.77 billion, a price-earnings ratio of 27.59, a cash-debt ratio of 0.10 and a return on capital of 5.07%. According to the Peter Lynch chart, shares are trading above their fair value.


During the third quarter of 2019, Occidental acquired Anadarko Petroleum Corp. for $55 billion, which some analysts considered a negative sign due to the fact that it increased the company's debt. Occidental's Altman-Z score is at 0.77, meaning it may have trouble meeting its long-term debt obligations, although its current ratio of 1.33 suggests that it can meet its short-term debt obligations.

President and CEO Vicki Hollub remains positive that the combined companies can realize significant cost savings thanks to the merger, saying in a statement, "We expect to deliver at least $3.5 billion annually in cost and capital spending synergies and the focus of our Board and management team is on execution to achieve the promise of this exciting combination. We look forward to updating the market on our continued progress in the months ahead."

The market has not yet seen the full effects of the Anadarko acquisition on Occidental's top line. If the revenue boost and synergy are high enough, the stock's steady decline since the announcement of the merger could mean that it is trading at an attractive valuation.



The fund also invested more in Macerich, increasing its stake by 87.47% to a total of 1,421,176 share. The trade impacted the equity portfolio by 1.38%. Shares were trading at an average price of $29.12 during the quarter.


Macerich is a real estate investment trust that operates as the third-largest shopping center owner in the United States. It is headquartered in Santa Monica, California.

As of Feb. 6, the company has a market cap of $3.5 billion, a price-earnings ratio of 43.3, a cash-debt ratio of 0.02 and a return on capital of 242.04%. According to the Peter Lynch chart, shares are trading near their fair value.


Macerich's profits have been on the decline for the past several years. Over the past three years, its revenue has declined 5.8% per year, while its earnings per share without non-recurring items has declined 48.5% per year.

As you can see in the chart below, the company reported net income that was higher than revenue for full-year 2014. According to the company's SEC filings, "The increase in net income is primarily attributed to an increase of $1.4 billion from gain on remeasurement of assets offset in part by a decrease of $289.9 million of total income from discontinued operations."


In other words, the company's actual net income decreased from 2013 to 2014, but the company's revaluation of its assets, which was geared toward increasing the profitability of its assets, skewed this measure quite a bit. Such moves are often a sign of financial desperation for large-scale property owners, so it is no surprise that 2014 marked the beginning of a decline in the share price.

The result of all this is that a major shopping center REIT may very well be trading at a bargain in terms of its potential. The decline of the stock also means that the dividend yield is at 12.08%, which is higher than 95.91% of competitors.

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

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This article first appeared on GuruFocus.