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The Top 5 Buys of Howard Marks' Oaktree Capital

- By Sydnee Gatewood

Howard Marks (Trades, Portfolio)' Oaktree Capital Management released its fourth-quarter 2018 portfolio last week, listing 10 new holdings.


The alternative asset management firm, which is headquartered in Los Angeles, says on its website it focuses on delivering superior results while observing its six-tenet investment philosophy: risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing.

Based on these criteria, the firm's five largest new buys for the quarter were Infinera Corp. (INFN), Caesars Entertainment Corp. (CZR), Alibaba Group Holding Ltd. (BABA), Contura Energy Inc. (CTRA) and C&J Energy Services Ltd. (CJ).

Infinera

The firm invested in 20.9 million shares of Infinera for an average price of $4.96 per share, allocating 2.22% of the equity portfolio to the stake.

The California-based manufacturer of telecommunication equipment has an $873.18 million market cap; its shares closed at $4.99 on Friday with a price-book ratio of 1.06 and a price-sales ratio of 0.93.

The median price-sales chart shows the stock is trading below its historical value.

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GuruFocus rated Infinera's financial strength 6 out of 10. Driven by a decline in revenue per share over the last three years, the Altman Z-Score of 0.91 warns the company is in danger of going bankrupt. The company's profitability and growth did not fare as well, scoring a 4 out of 10 rating as a result of negative margins and returns that underperform competitors. In addition, the company has a low Piotroski F-Score of 3, which suggests poor operating conditions, and a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.

With its purchase of 11.99% of outstanding shares, Oaktree became the company's largest guru shareholder. During the quarter, Ken Fisher (Trades, Portfolio) added to his stake while Paul Tudor Jones (Trades, Portfolio) trimmed his position.

Caesars Entertainment

Having previously sold out of Caesars Entertainment in the third quarter of 2013, Oaktree established a new 10 million-share stake for an average price of $8.35 per share. The trade had an impact of 1.80% on the equity portfolio.

The casino and resorts operator, which is headquartered in Las Vegas, has a market cap of $6.13 billion; its shares closed at $9.15 on Friday with a price-earnings ratio of 0.62, a price-book ratio of 1.98 and a price-sales ratio of 0.60.

According to the Peter Lynch chart, the stock is undervalued since it is trading below its fair value.

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Caesars Entertainment's financial strength and profitability and growth were both rated 4 out of 10 by GuruFocus. In addition to having poor interest coverage and declining revenue per share, the Altman Z-Score of 0.66 warns the company is at risk of bankruptcy. Although the operating margin is in decline, it still outperforms 52% of industry peers. The company also has fairly good returns, a moderate Piotroski F-Score of 5, which indicates operations are stable, and a one-star business predictability rank.

Of the gurus invested in Caesars, George Soros (Trades, Portfolio) has the largest position with 4.95% of outstanding shares. David Tepper (Trades, Portfolio), John Paulson (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) are also shareholders.

Alibaba

After closing a position in Alibaba in the second quarter, the firm opened a new 318,380-share holding for an average price of $147.56 per share, dedicating 1.16% of the equity portfolio to the position.

The Chinese e-commerce company has a $427.33 billion market cap; its shares closed at $166.15 on Friday with a price-earnings ratio of 42.49, a price-book ratio of 6.49 and a price-sales ratio of 8.41.

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

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Supported by adequate interest coverage and a robust Altman Z-Score of 6.17, GuruFocus rated Alibaba's financial strength 7 out of 10. The company's profitability and growth scored a 9 out of 10 rating. Although the operating margin is in decline, it still outperforms 98% of competitors. The Chinese company is also supported by good returns, a moderate Piotroski F-Score of 6 and a 3.5-star business predictability rank, which is on watch despite posting consistent earnings and revenue growth. GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.

PRIMECAP Management (Trades, Portfolio) is the company's largest guru shareholder with 0.59% of outstanding shares. Other guru investors include Frank Sands (Trades, Portfolio), Fisher, Andreas Halvorsen (Trades, Portfolio), Steve Mandel (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Chris Davis (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Chase Coleman (Trades, Portfolio).

Contura Energy

The investment firm picked up 355,590 shares of Contura Energy for an average price of $70.51 per share, giving it 0.62% space in the equity portfolio.

The Tennessee-based coal miner has a market cap of $1.21 billion; its shares closed at $62.99 on Friday with a price-earnings ratio of 2.74, a price-book ratio of 2.61 and a price-sales ratio of 0.38.

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

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Contura's financial strength was rated 6 out of 10 by GuruFocus. In addition to having adequate interest coverage, the Altman Z-Score of 4.75 indicates the company is in good fiscal health. Weighed down by margins and returns that underperform industry peers, the company's profitability and growth scored a 5 out of 10 rating. The coal producer is also supported by a moderate Piotroski F-Score of 6.

Oaktree is now the company's largest guru shareholder with 1.85% of outstanding shares. Chuck Royce (Trades, Portfolio) also established a position in the stock during the quarter.

C&J Energy Services

Oaktree purchased 1.33 million shares of C&J Energy for an average price of $17.67 per share, allotting 0.48% of the equity portfolio to the stake.

The oil and gas equipment and services company, which is based in Houston, has a $1.14 billion market cap; its shares closed at $16.98 on Friday with a price-earnings ratio of 9.28, a price-book ratio of 0.84 and a price-sales ratio of 0.51.

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

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Boosted by good interest coverage and no long-term debt, GuruFocus rated C&J Energy's financial strength 9 out of 10. In addition, the high Altman Z-Score of 3.96 suggests the company is financially stable. The company's profitability and growth scored a 5 out of 10 rating. Despite having a declining operating margin and deteriorating revenue per share, the company is supported by steady returns that outperform competitors and a high Piotroski F-Score of 7, which suggests conditions are healthy.

Withh 8.77% of outstanding shares, Hotchkis & Wiley is the company's largest guru shareholder. Steven Cohen (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Arnold Schneider (Trades, Portfolio), Fisher, Jim Simons (Trades, Portfolio)' Renaissance Technologies, Jones and Jeremy Grantham (Trades, Portfolio) are also invested in the stock.

Additional trades

During the quarter, Oaktree also started positions in Yandex NV (YNDX), Rowan Companies PLC (RDC), DTE Energy Co. (DTV), Yeti Holdings Inc. (YETI) and the iShares iBoxx $ High Yield Corporate Bond (HYG) exchange-traded fund.

The firm's $3.76 billion equity portfolio, which is composed of 84 stocks, is heavily invested in the industrials and utilities sectors.

Disclosure: No positions.

Read more here:

  • Howard Marks: There Are No Silver Bullets
  • Howard Marks on Being a Contrarian
  • Howard Marks on Risk Avoidance


This article first appeared on GuruFocus.