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The Top 5 Buys of First Pacific Advisors

- By Sydnee Gatewood

Investment firm First Pacific Advisors (Trades, Portfolio) disclosed 10 new positions in its first-quarter portfolio, which was released earlier this month.


With the goal of generating superior long-term results and preserving capital, the Los Angeles-based firm says on its website it takes a disciplined approach to value investing. The portfolio managers look for opportunities among stocks whose intrinsic values exceed the price paid with a reasonable margin of safety. As of March 31, FPA had approximately $28 billion in assets under management.

Based on these criteria, the firm's top five new buys for the quarter were Univar Inc. (UNVR), Cabot Corp. (CBT), Cheesecake Factory Inc. (CAKE), LGI Homes Inc. (LGIH) and Vail Resorts Inc. (MTN).

Univar

After closing a position in Univar in the second quarter of 2016, the firm opened a new 7.8 million-share stake, giving it 1.51% space in the equity portfolio. The stock traded for an average price of $21.51 per share during the quarter.

The Downers Grove, Illinois-based chemical manufacturer has a $3.54 billion market cap; its shares were trading around $20.51 on Friday with a price-earnings ratio of 63.21, a price-book ratio of 1.78 and a price-sales ratio of 0.36.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

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Univar's financial strength and profitability and growth were both rated 5 out of 10 by GuruFocus. In addition to having poor interest coverage and recording a decline in revenue per share over the last five years, the Altman Z-Score of 1.68 warns the company could be at risk of going bankrupt.

While the company's operating margin is expanding, it still underperforms 68% of competitors. Univar is also supported by strong returns on equity and capital as well as a moderate Piotroski F-Score of 6, which indicates business conditions are stable.

Of the gurus invested in Univar, Seth Klarman (Trades, Portfolio) has the largest stake with 5.6% of outstanding shares. Steven Romick (Trades, Portfolio), Larry Robbins (Trades, Portfolio) and Jim Simons' (Trades, Portfolio) Renaissance Technologies also established positions during the quarter, while Joel Greenblatt (Trades, Portfolio) added to his holding.

Cabot

First Pacific invested in 529,143 shares of Cabot, dedicating 0.19% of the equity portfolio to the holding. The stock traded for an average per-share price of $45.01 during the quarter.

The specialty chemicals company, which is headquartered in Boston, has a market cap of $2.39 billion; its shares were trading around $40.93 on Friday with a price-earnings ratio of 9.22, a price-book ratio of 2.21 and a price-sales ratio of 0.74.

According to the Peter Lynch chart, the stock is undervalued.

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Cabot's financial strength and profitability and growth were both rated 5 out of 10 by GuruFocus. Although the company has issued approximately $276 million in new long-term debt over the last three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 2.84, however, suggests it is under some fiscal pressure as it has recorded a decline in revenue per share over the last five years.

While the operating margin is expanding, the company's returns are underperforming industry peers. Cabot also has a moderate Piotroski F-Score of 5 and a business predictability rank of one out of five stars. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.

With its purchase of 0.90% of outstanding shares, First Pacific became Cabot's largest guru shareholder. During the quarter, Hotchkis & Wiley and Steven Cohen (Trades, Portfolio) also took positions in the stock, while Chuck Royce (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) expanded their holdings.

Cheesecake Factory

The firm picked up 63,582 shares of Cheesecake Factory, allocating 0.03% of the equity portfolio to the position. During the quarter, shares traded for an average price of $45.95.

The Calabasas, California-based restaurant chain, which is known for serving a wide variety of global cuisine as well as an assortment of different cheesecake flavors, has a $1.99 billion market cap; its shares were trading around $43.97 on Friday with a price-earnings ratio of 20.21, a price-book ratio of 3.67 and a price-sales ratio of 0.86.

Based on the Peter Lynch chart, the stock appears to be overvalued.

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Cheesecake Factory's financial strength and profitability and growth were both rated 7 out of 10 by GuruFocus. Despite having comfortable interest coverage, the company's Altman Z-Score of 2.85 indicates it is under some fiscal stress.

Although the company's operating margin is in decline, it still outperforms 61% of competitors. Cheesecake Factory is also supported by strong returns, consistent earnings and revenue growth and a moderate Piotroski F-Score of 6. The 3.5-star business predictability rank, however, is on watch. According to GuruFocus, companies with this rank typically see their stocks gain an average of 9.3% per year.

Ron Baron (Trades, Portfolio) is Cheesecake Factory's largest guru shareholder with 1.77% of outstanding shares. The FPA Capital Fund (Trades, Portfolio) and Philippe Laffont (Trades, Portfolio) also established positions during the quarter, while Lee Ainslie (Trades, Portfolio), Royce, Cohen and Pioneer Investments (Trades, Portfolio) boosted their holdings.

LGI Homes

First Pacific purchased 50,439 shares of LGI Homes, expanding the equity portfolio 0.03%. The stock traded for an average per-share price of $57.72 during the quarter.

The homebuilder, which is headquartered in The Woodlands, Texas, has a market cap of $1.57 billion; its shares were trading around $68.56 on Friday with a price-earnings ratio of 11.68, a price-book ratio of 2.54 and a price-sales ratio of 1.14.

The Peter Lynch chart suggests the stock is undervalued.

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GuruFocus rated LGI Homes' financial strength 5 out of 10. While the company has issued approximately $349.68 million in new long-term debt over the last three years, it is at a manageable level. The robust Altman Z-Score of 4.28 also indicates the company is in good fiscal standing despite recording a slowdown in revenue per share growth over the last 12 months.

The company's profitability and growth scored a 7 out of 10 rating, driven by an expanding operating margin and strong returns that outperform industry peers. LGI also has a low Piotroski F-Score of 3, which implies poor business operations.

Of the gurus invested in LGI Homes, Ken Heebner (Trades, Portfolio) has the largest holding with 1.41% of outstanding shares. Royce, Hotchkis & Wiley and Greenblatt also have positions in the stock.

Vail Resorts

The investment firm bought 17,689 shares of Vail Resorts, impacting the equity portfolio by 0.03%. During the quarter, shares traded for an average price of $204.15.

The Broomfield, Colorado-based company, which operates a chain of mountain resorts and ski lodges, has an $8.67 billion market cap; its shares were trading around $215.35 on Friday with a price-earnings ratio of 33.32, a price-book ratio of 6.04 and a price-sales ratio of 4.16.

According to the Peter Lynch chart, the stock is overvalued.

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GuruFocus rated Vail Resorts' financial strength 5 out of 10. Although the company has issued approximately $540.8 million in new long-term debt over the last three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 2.98 also suggests the company is under some fiscal pressure as a result of posting an operating income loss over the last three years.

The company's profitability and growth scored an 8 out of 10 rating, boosted by operating margin expansion, strong returns that outperform competitors, a moderate Piotroski F-Score of 6 and a one-star business predictability rank.

With 12.08% of outstanding shares, Baron is Vail Resorts' largest guru shareholder. Diamond Hill Capital (Trades, Portfolio), Pioneer and the FPA Capital Fund (Trades, Portfolio) also own the stock.

Additional trades

During the quarter, First Pacific also established holdings in Valmont Industries Inc. (VMI), Intel Corp. (INTC), Fox Corp. (FOXA), Accenture PLC (ACN) and IHS Markit Ltd. (INFO).

The firm's $11.41 billion equity portfolio, which is made up of 132 stocks, is largely invested in the financial services and technology sectors.

Disclosure: No positions.

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This article first appeared on GuruFocus.