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Top 1st-Quarter Trades of the Smead Value Fund

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- By Margaret Moran

The Smead Value Fund (Trades, Portfolio) recently disclosed its portfolio updates for its fiscal first quarter of 2021, which ended on Feb. 28.


The fund operates under Smead Capital Management. Its contrarian investing strategy is based on large-cap stocks that meet the following criteria: serve 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. The fund is managed by lead portfolio manager Bill Smead, along with co-portfolio managers Tony Scherrer, CFA and Cole Smead, CFA.

Based on its investing criteria, the fund's top buys for the quarter were Chevron Corp. (NYSE:CVX) and Viatris Inc. (NASDAQ:VTRS), while its biggest sells were Target Corp. (NYSE:TGT) and Discovery Inc. (NASDAQ:DISCA).

Chevron

The fund increased its Chevron (NYSE:CVX) investment by 177,442 shares, or 47.75%, for a total holding of 549,036 shares. The trade had a 1.23% impact on the equity portfolio. During the quarter, shares traded for an average price of $90.83.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Chevron is a member of the "Big Six" multinational oil companies that dominate the U.S. market share. Headquartered in San Ramon, California, the company explores for and refines oil and natural gas and produces a variety of chemicals, including ethylene, polyethylene, aromatics and styrenics.

On April 30, shares of Chevron traded around $103.07 for a market cap of $198.65 billion. According to the GuruFocus Value chart, the stock is modestly overvalued.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

The company has a financial strength rating of 4 out of 10 and a profitability rating of 5 out of 10. The cash-debt ratio of 0.13 is lower than 71% of competitors, but the Piotroski F-Score of 4 out of 9 is typical of a financially stable company. The three-year revenue growth rate is -10.7%, while the three-year Ebitda growth rate is -23.5%.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Viatris

The fund also purchased an additional 1,136,330 shares of Viatris (NASDAQ:VTRS), increasing the investment by 1,106.37% for a total holding of 1,239,038 shares. The trade had a 1.17% impact on the equity portfolio. Shares traded for an average price of $17.58 during the quarter.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Viatris is a global generic and specialty pharmaceuticals company that was formed from the merger of Mylan N.V. and Pfizer's (PFE) off-patient medicine division in November of 2020. The company's goal is to provide universal access to medicine through its profile of generic, branded generic, brand-name and biosimilar drugs.

On April 30, shares of Viatris traded around $13.30 for a market cap of $16.05 billion. According to the GF Value chart, the stock is modestly undervalued.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

The company has a financial strength rating of 3 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.04 and Altman Z-Score of 0.6 indicate the company could be in danger of going bankrupt over the next couple of years. The operating margin and net margin have been declining in recent years and are now both in the negatives range at -0.86% and -5.61%, respectively.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Target

The fund trimmed its Target (NYSE:TGT) holding by 67,487 shares, or 13.07%, for a remaining stake of 448,826 shares. The trade had a -1.02% impact on the equity portfolio, though Target remains the fund's third-largest holding. During the quarter, shares traded for an average price of $183.51.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Target is an American retail company that sells a wide variety of everyday necessities, including food, beverages, clothes, toiletries, home goods, furniture, electronics and more. It is the eighth-largest company of its kind in the U.S.

On April 30, shares of Target traded around $207.26 for a market cap of $103.13 billion. According to the GF Value chart, the stock is significantly overvalued.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

The company has a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. The Altman Z-Score of 4.16 and Piotroski F-Score of 8 out of 9 indicate a fortress-like balance sheet. The return on invested capital is consistently higher than the weighted average cost of capital, indicating the company is creating value.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Discovery

The fund also trimmed its Discovery (NASDAQ:DISCA) position by 397,773 shares, or 14.68%, for a remaining holding of 2,311,149 shares. The trade had a -0.90% impact on the equity portfolio, but Discovery remains the fund's top holding. Shares traded for an average price of $37.05 during the quarter.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Established in 1985, New York-based Discovery is a multinational media company that primarily operates a group of factual and lifestyle television brands, such as Discovery Channel, Animal Planet, Science Channel and TLC.

On April 30, shares of Discovery traded around $37.66 for a market cap of $17.47 billion. According to the GF Value chart, the stock is modestly overvalued.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

The company has a financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.14 is lower than 84% of competitors, but the Piotroski F-Score of 5 out of 9 is typical of a financially stable company. The three-year revenue growth rate is 10%, while the three-year Ebitda growth rate is 30.5%.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

Portfolio overview

As of the quarter's end, the Smead Value Fund (Trades, Portfolio) held common stock positions in 29 companies valued at a total of $1.44 billion, with a turnover rate of 8% for the period. The top holdings were Discovery with 8.50% of the equity portfolio, American Express Co. (NYSE:AXP) with 5.89% and Target with 5.71%.

In terms of sector weighting, the fund was most invested in the consumer cyclical, financial services and communication services industries.

Top 1st-Quarter Trades of the Smead Value Fund
Top 1st-Quarter Trades of the Smead Value Fund

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.