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Top 10 Value Stocks to Invest In According to ValueAct Capital

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·10 min read
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In this article, we will review the top 10 value stocks to invest in according to ValueAct Capital. You can skip our detailed analysis of Jeffrey Ubben's history, investment philosophy, and hedge fund performance, and go directly to the Top 5 Value Stocks to Invest In According to ValueAct Capital.

Value investing legend Jeffrey Ubben has generated a return of 14% annually for investors since he founded ValueAct Capital in 2000. He stepped down from ValuAct Capital’s chairman role last year and left the firm for social and ESG investing.

"I’m late in life. I’ve got five years to fix the harm I’ve done.” Ubben, 59, said in an interview with Bloomberg.

Activist investor and ESG proponent Jeff Ubben was overseeing ValueAct’s sustainable investing Spring Fund. Besides that, during his tenure at ValueAct, his relentless focus on shareholder value helped him to generate lofty gains.

As chief investment officer and chairman of ValueAct, the activist investor initiated big positions in the world’s largest companies including 21st Century Fox Inc, Microsoft Corporation (NASDAQ: MSFT), Halliburton Company (NYSE: HAL), and Rolls-Royce Holdings plc (OTC: RYCEY). He hasn’t been known for putting extra pressure on companies’ management, helping him to earn a reputation as a nice-guy activist.

“We thought we would go on boards and make companies more financially healthy, and we would get an idiosyncratic return for that. That is what we did, and to a certain extent we caused the harm.. We ourselves, I think, built unsustainable companies by maximizing profit,” he said.

A hedge fund veteran, who was in 15 boardrooms during his career, likes to create a concentrated stock portfolio, with a strategy of buying companies that are undergoing major restructuring or appear to be out of favor. His hedge fund held a stake in 11 companies at the end of 2020 and the top ten stock holdings represented 99.50% of the $8.62 billion worth of 13F portfolio. In fact, the top three holdings weighted around 58% of the overall portfolio at the end of December. Seagate Technology plc (NASDAQ: STX) was the largest stock holding of ValueAct at the end of last year followed by Citigroup Inc. (NYSE: C) and KKR & Co. Inc. (NYSE: KKR).

Ubben’s ValuAct has spread investments across five sectors including information technology, industrials, real estate, and healthcare. However, investments in the finance sector represent close to 47% of the 13F portfolio.

Ubben joined one of the world’s largest oil & gas companies Exxon Mobil Corporation (NYSE: XOM) last month amid his socially responsible investing strategy. The chairman and chief executive officer of Atairos Mike Angelakis also joined the Exxon board along with Jeff Ubben. The move was the outcome of investors’ pressure on Exxon Mobil Corporation (NYSE: XOM) management for sluggish share price performance and lack of investments in clean energy initiatives. Previously, Jeff Ubben had invested in oil companies like BP p.l.c. (NYSE: BP), saying traditional oil and gas companies could also be added to ESG stock portfolios.

“They can be part of the solution. They can move to carbon capture, and hydrogen and other things with their capital spend to become a company of the future,” Jeff Ubben said.

Top 10 Value Stocks to Invest In According to ValueAct Capital
Top 10 Value Stocks to Invest In According to ValueAct Capital

Jeffrey Ubben of ValueAct Capital

While Jeff Ubban’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Let’s start digging into the top 10 value stocks to invest in according to ValueAct Capital:

10. CDW Corporation (NASDAQ: CDW)

Value: $48,514,000 Percent of Jeffrey Ubben's 13F Portfolio: 0.56% No. of Hedge Fund Holders: 43

The integrated technology solutions provider CDW Corporation (NASDAQ: CDW) is the tenth-largest stock holding of ValueAct’s stock portfolio. The firm first initiated a position in CDW during the third quarter of 2020 and raised its stake by 51% in the final quarter. ValueAct held 368,116 shares of CDW valued at $48.51 million. CDW stock price grew more than 50% in the past six months.

In their Q1 investor letter, Baron Asset Fund mentioned a few stocks including CDW Corporation. Here is what Baron Asset Fund stated:

“Shares of CDW Corporation, a value-added reseller that provides integrated information technology solutions, contributed to performance. The company reported strong fourth-quarter earnings and issued 2021 guidance ahead of investor expectations. As the economy continues its post-pandemic recovery, we believe CDW Corporation (NASDAQ: CDW) will be in a strong competitive position that will allow it to compound earnings at a low double-digit rate. Technology is becoming an ever more critical and complex area of investment for businesses worldwide, and we believe CDW is well-positioned to benefit from this trend.”

9. Bausch Health Companies Inc. (NYSE: BHC)

Value: $373,185,000 Percent of Jeffrey Ubben's 13F Portfolio: 4.32% No. of Hedge Fund Holders: 43

The manufacturer of pharmaceutical products Bausch Health Companies Inc. (NYSE: BHC) is one of the top 10 value stocks to invest in. This is because of its strong share price momentum. BHC stock price grew 56% since the beginning of this year. It is the long-running stock holding of ValueAct’s stock portfolio. The firm first initiated a position in Bausch Health in 2006 and it is currently ranked at ninth spot with a weighting of 4.33% of the portfolio.

Bausch Health Companies Inc. (NYSE: BHC) has experienced an increase in support from the world’s most elite money managers lately. Bausch Health Companies was in 43 hedge funds’ portfolios at the end of December compared to 41 positions in the previous quarter.

In one of their investor letters, Chou Associates Management highlighted a few stocks and Bausch Health Companies Inc. (NYSE:BHC) is one of them. Here is what Chou Associates Management said:

"In early August, Bausch Health Companies Inc. announced that it is planning to spin off its eye care business, Bausch + Lomb, into an independent publicly traded company. This will allow the company to concentrate on its gastroenterology, aesthetics/dermatology, neurology and international pharma business.

Chairman and CEO Joseph Papa said, “We’ve looked at the value of our pure health companies like Alcon and Cooper and believe that Bausch + Lomb would compare very favorably when investors have an opportunity to make a judgment about the relative value of the stand-alone business”.

Comparables like Cooper Companies and Alcon Inc. are currently trading between 18 and 20 times EBITDA. If Bausch Health Companies Inc. (NYSE: BHC) + Lomb trades at similar multiples as a stand-alone company, the total value of Bausch Health using sum-of-the-parts method, net of debt, should be worth north of $35 per share, as an inference. For a long time we have felt that Bausch was undervalued, but the investors were not giving credit that management has done a good job in running the operations, selling non-core assets, as well as de-leveraging its balance sheet. They felt the process was too slow, we hope the spin-off of Bausch + Lomb unit will be the catalyst that is needed for investors to price the company closer to its intrinsic value.”

8. SLM Corporation (NASDAQ: SLM)

Value: $400,126,000 Percent of Jeffrey Ubben's 13F Portfolio: 4.64% No. of Hedge Fund Holders: 19

The private education loan provider SLM Corporation (NASDAQ: SLM) is one of the top value stocks to invest in based on ValueAct portfolio. Its share price rallied 151% in the past twelve months, thanks to substantial revenue growth trends. Its three-year average revenue growth stands around 27% while earnings per share is soaring at a high double-digit rate. SLM Corporation also offers dividends to shareholders.

ValueAct held 32.29 million shares of SLM Corporation at the end of 2020, accounting for 4.64% of the 13F portfolio. The firm first initiated a position in SLM in 2018.

7. Morgan Stanley (NYSE: MS)

Value: $567,683,000 Percent of Jeffrey Ubben's 13F Portfolio: 6.58% No. of Hedge Fund Holders: 66

ValueAct has been holding a position in banking giant Morgan Stanley (NYSE: MS) over the past four years. MS stock holding represented 6.58% of the overall portfolio at the end of 2020. The share price of Morgan Stanley grew 20% so far in 2020, extending twelve-month gains to over 100%. Morgan Stanley (NYSE: MS) is among the top 10 best value stocks to invest in.

Artisan Partners Limited Partnership, a high value-added investment management firm, highlighted a few stocks including Morgan Stanley in the first quarter investor letter. Here is what Artisan Partners Limited Partnership stated:

“Top three contributor Morgan Stanley, a leading global financial services company, came into the portfolio in Q4 as a result of its purchase of E*TRADE. E*TRADE is a great fit on Morgan Stanley (NYSE: MS)'s wealth management platform and provides a considerable amount of non-interest-bearing deposit funding. James Gorman, chairman and CEO, has steadily de-risked Morgan Stanley’s business by adding less volatile fee streams and deemphasizing the risk-obtuse culture of prior management. We believe the market will come to appreciate this mix shift over time.”

6. CBRE Group, Inc. (NYSE: CBRE)

Value: $641,614,000 Percent of Jeffrey Ubben's 13F Portfolio: 7.44% No. of Hedge Fund Holders: 31

The real estate and investment company CBRE Group, Inc. (NYSE: CBRE) is the sixth-largest stock holding of ValueAct’s stock portfolio at the end of 2020. The firm held 10.22 million shares of CBRE, accounting for 7.44% of the overall portfolio. CBRE is a member of ValueAct’s portfolio since 2011.

The number of bullish hedge fund positions in CBRE rose by 7 lately. CBRE Group was in 31 hedge funds’ portfolios at the end of the fourth quarter of 2020 compared to 24 positions in the previous quarter.

In their Q3 2020 investor letter, Oakmark Fund highlighted a few stocks and CBRE Group Inc. (NYSE:CBRE) is one of them. Here is what Oakmark Fund’s said:

"CBRE Group is the largest commercial real estate services firm in the U.S. The company has significant scale across its various service lines and geographies, enabling it to consistently invest more than its smaller peers into the research, tools and technology that customers value. This industry-leading value proposition has driven consistent share gains for CBRE Group Inc. (NYSE:CBRE) in recent years as large clients have been attracted to the company’s differentiated capabilities and the best brokers have been attracted by the steady stream of clients. We expect CBRE to continue to gain market share in this highly fragmented brokerage industry for many years to come while it further transitions away from transaction-driven commissions and toward contractual fee revenues. Outsized fears around work from home have caused the company to sell for less than 9x our estimate of mid-cycle earnings. We think this is a bargain price for this high-quality and well-managed business.”

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Disclosure: None. Top 10 Value Stocks to Invest In According to ValueAct Capital is originally published on Insider Monkey.