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Top 1st-Quarter Buys of Donald Smith's Firm

Donald Smith & Co. recently announced its portfolio updates for the first quarter of 2020.

The firm, which was founded by Donald Smith (Trades, Portfolio) in 1980, specializes in out-of-favor stocks that are trading at a discount to their tangible book value. The portfolio managers look for stocks with good earnings expectations over the next two to four years and maintain concentrated funds in order to focus on their best ideas. After Smith passed away in late 2019, he was succeeded as CEO by Richard Greenberg, who is also the co-chief investment officer along with Jon Hartsel.


Based on the firm's investing criteria, its top buys for the first quarter were The Mosaic Co. (NYSE:MOS), Equinox Gold Corp. (EQX) and Domtar Corp. (NYSE:UFS).

The Mosaic Co.

The firm added 3,624,327 shares to its position in Mosaic, increasing the stake by 212.54% to a total of 5,329,551 shares and impacting the equity portfolio by 2.35%. Shares traded for an average price of $17.15 during the quarter.

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Based in Tampa, Florida, Mosaic is the world's largest producer of potash and phosphate fertilizers. Mosaic mines phosphate from land in Florida and Peru and potash from New Mexico. It is also in the process of establishing a joint phosphate venture in Saudi Arabia, which, when complete, is expected to yield the company 25% of the annual mining volume of 3 million tons.

On May 12, shares of Mosaic traded around $11.01 for a market cap of $4.21 billion and a price-book ratio of 0.48. According to the Peter Lynch chart, shares may be undervalued compared to historical earnings, though the company earned a net loss in 2019.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rating of 6 out of 10 and a business predictability rating of one out of five stars.

The cash-debt ratio of 0.19 is lower than 68.14% of competitors. Both the interest coverage ratio of 0.47 and the Altman Z-Score of 1.22 indicate that the company could be in danger of bankruptcy if it cannot secure additional liquidity.

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The operating margin of 1.12% is also low for the industry, but the three-year revenue growth rate of 4.4% shows positive top-line improvement. The company's weighted average cost of capital is higher than its return on invested capital, indicating a lack of profitability.

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Equinox Gold Corp.

The firm also established a new position of 3,598,106 shares in Equinox Gold Corp., which had a 1.43% impact on the equity portfolio. During the quarter, shares traded for an average price of $7.90.

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Equinox Gold is a mining company based in Vancouver, Canada. It has six producing gold mines in the U.S., Brazil and Mexico, as well as four growth projects and a gold reserve base.

On May 12, shares of Equinox Gold traded around $8.55 for a market cap of $1.89 billion and a price-book ratio of 2.57. During the company's publicly traded history, it has not returned positive net income.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rating of 1 out of 10 and a business predictability rating of one out of five stars.

The cash-debt ratio of 0.26% is low for the industry, but the Altman Z-Score of 2.93 suggests that the company is safe from bankruptcy.

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The operating margin of 28.21% is higher than 83.48% of competitors and ROIC recently exceeded WACC, indicating profitability. However, earnings per share without non-recurring items has declined at a rate of 30.8% per year over the past three years.

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Domtar Corp.

The firm invested in 947,181 shares of Domtar after selling out of its previous holding in the company in the second quarter of 2012. The trade had a 1.23% impact on the equity portfolio. Shares traded for an average price of $32.10 during the quarter.

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Domtar is a paper mill company based in Fort Mill, South Carolina. It is the world's second-largest producer of uncoated free-sheet paper and produces a variety of other paper products as well, including specialty papers, market pulp and paper-based hygiene products.

On May 12, shares of Domtar traded around $21.13 for a market cap of $1.17 billion and a price-book ratio of 0.55. According to the Peter Lynch chart, the price is high compared to earnings for the previous two quarters but low compared to 2018 and early 2019 earnings.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rating of 6 out of 10 and a business predictability rating of one out of five stars.

The cash-debt ratio of 0.13 is lower than 81.65% of competitors, but the interest coverage ratio of 3.12 and current ratio of 2.06 indicate sufficient liquidity to pay short-term creditors.

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The operating margin of 3.1% is below the industry median of 4.58%, while the three-year revenue growth rate of 1.6% is lower than 62.34% of competitors. The company's WACC is higher than its ROIC, suggesting low profitability.

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Portfolio overview

As of the quarter's end, the firm held 66 common stock positions for an equity portfolio valued at $1.67 billion. The top holdings were Gold Fields Ltd. (NYSE:GFI) with 8.91% of the equity portfolio, Air France-KLM (AFLYY) with 7.2% and AerCap Holdings NV (NYSE:AER) with 6.72%.

The turnover for the quarter was 13%. In terms of sector weighting, the firm was most invested in basic materials, industrials and financial services.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.

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This article first appeared on GuruFocus.