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The Top 5 Buys of Howard Marks' Oaktree

- By Sydnee Gatewood

Howard Marks (Trades, Portfolio)' Oaktree Capital Management released its first-quarter portfolio earlier this month, listing eight new holdings.


The Los Angeles-based alternative asset management firm 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 top five buys for the quarter were Berry Petroleum Corp. (BRY), Danaher Corp. (DHRAA.PFD), Fortive Corp. (NYSE:FTVPA.PFD), American Electric Power Co. Inc. (NYSE:AEP-PB) and Stanley Black & Decker Inc. (SWP).

Berry Petroleum

The firm invested in 7.8 million shares of Berry Petroleum, dedicating 2.33% of the equity portfolio to the stake. The stock traded for an average price of $11.34 per share during the quarter.

The Bakersfield, California-based oil and gas producer has an $890.03 million market cap; its shares were trading around $10.89 on Tuesday with a price-earnings ratio of 20.92, a price-book ratio of 0.97 and a price-sales ratio of 1.16.

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

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GuruFocus rated Berry Petroleum's financial strength 5 out of 10. In addition to having insufficient interest coverage, the Altman Z-Score of 1.67 warns the company is at risk of going bankrupt.

The company's profitability and growth fared even worse, scoring a 3 out of 10 rating. Although its margins and returns are positive, they still underperform a majority of competitors.

With its purchase of 9.53% of outstanding shares, Oaktree is now Berry Petroleum's largest guru shareholder. During the quarter, Hotchkis & Wiley, George Soros (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) added to their positions.

Danaher

Marks' firm picked up 7,000 preferred shares of Danaher, allocating 0.19% of the portfolio to the holding. The stock traded for an average per-share price of $1,029.91 during the quarter.

Headquartered in Washington, D.C., the conglomerate, which produces instruments and supplies for the health care space, has a market cap of $93.71 billion; its common stock (DHR) was trading around $130.71 on Tuesday with a price-earnings ratio of 38.60, a price-book ratio of 3.12 and a price-sales ratio of 4.62.

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

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Danaher's financial strength and profitability and growth were both rated 7 out of 10 by GuruFocus. In addition to having adequate interest coverage, the Altman Z-Score of 4.23 suggests the company is in good fiscal standing.

In addition to operating margin expansion, the company is supported by returns that outperform industry peers, steady earnings and revenue growth and a moderate Pitroski F-Score of 6, which indicates business conditions are stable. The company also has a business predictability rank of 2.5 out of five stars. GuruFocus says companies with this rank typically see their stocks gain an average of 7.3% per year.

While no other gurus are invested in Danaher's preferred stock, the Vanguard Health Care Fund (Trades, Portfolio) has the largest holding of its common stock with 0.67% of outstanding shares. Other top guru shareholders include Dodge & Cox, Daniel Loeb (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Chuck Akre (Trades, Portfolio), the MS Global Franchise Fund (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), the Eaton Vance Worldwide Health Sciences Fund (Trades, Portfolio) and Arnold Van Den Berg (Trades, Portfolio).

Fortive

After closing a position in Fortive's preferred stock in fourth-quarter 2018, Oaktree opened a new 5,500-share holding. The trade had an impact of 0.15% on the equity portfolio. The preferred shares traded for an average price of $996.26 during the quarter.

The Everett, Washington-based industrial growth company, which develops and manufactures professional and engineered products, software and services for a range of customers, has a $25.94 billion market cap; its common shares (FTV) were trading around $77.13 on Tuesday with a price-earnings ratio of 9.60, a price-book ratio of 3.84 and a price-sales ratio of 4.28.

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

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Fortive's financial strength and profitability and growth were both rated 6 out of 10 by GuruFocus. While the company has poor earnings quality and has issued approximately$6.1 billion in new long-term debt over the last several years, it is at a manageable level due to comfortable interest coverage. The Altman Z-Score of 2.98 also suggests the company is under some fiscal pressure.

Boosted by strong margins and returns that outperform competitors, the Piotroski F-Score of 7 indicates operations are healthy.

While Marks' firm is the only guru invested in the preferred stock, Pioneer, Joel Greenblatt (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) have positions in the common stock.

American Electric Power

Oaktree purchased 70,000 preferred shares of American Electric Power, giving it 0.09% space in the equity portfolio. During the quarter, the stock traded for an average price of $51.18 per share.

The utility company, which is based in Columbus, Ohio, has a market cap of $43.13 billion; its common shares (AEP) were trading around $87.20 on Tuesday with a price-earnings ratio of 21.15, a price-book ratio of 2.25 and a price-sales ratio of 2.67.

The Peter Lynch chart shows the stock is overvalued.

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Weighed down by issuing approximately $4.9 billion in new long-term debt over the last three years and poor interest coverage, American Electric's financial strength was rated 4 out of 10 by GuruFocus. In addition, the Altman Z-Score of 1 warns the company is in danger of bankruptcy.

The company's profitability and growth fared a bit better, scoring a 6 out of 10 rating. Although the operating margin is in decline, it still outperforms at least 64% of industry peers. American Electric also has a moderate Piotroski F-Score of 5 and a one-star business predictability rank, which is on watch. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.

No other gurus hold the preferred stock. In regard to the common stock, Jim Simons (Trades, Portfolio)' Renaissance Technologies has the largest holding with 1.01% of outstanding shares. Pioneer, Steven Cohen (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and John Hussman (Trades, Portfolio) are also shareholders.

Stanley Black & Decker

After exiting a position in Stanley Black & Decker's preferred stock in fourth-quarter 2018, the firm entered a new 37,500-share holding. The trade expanded the equity portfolio 0.09%. The stock traded for an average price of $96.21 per share during the quarter.

The New Britain, Connecticut-based manufacturer of tools and household hardware has a $19.88 billion market cap; its common shares (SWK) were trading around $130.37 on Tuesday with a price-earnings ratio of 30.81, a price-book ratio of 2.72 and a price-sales ratio of 1.43.

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

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GuruFocus rated Stanley Black & Decker's financial strength 5 out of 10. Although the company has issued approximately $1.4 billion in new long-term debt over the last three years, it is at a manageable level as a result of sufficient interest coverage. The Altman Z-Score of 2.12, however, indicates the company is under some fiscal pressure.

The company's profitability and growth scored a 7 out of 10 rating, boosted by an expanding operating margin and a moderate Piotroski F-Score of 5. Stanley Black & Decker's one-star business predictability rank is on watch despite recordings consistent earnings and revenue growth over the past 10 years.

In addition to Marks' firm, Gabelli also holds the preferred stock.

Additional trades

During the quarter, the firm also established positions in the preferred stock of New York Community Capital Trust V (NYCBPU.PFD), Diamond S Shipping Inc. (DSSI) and Siga Technologies Inc. (SIGA).

Oaktree's $3.87 billion equity portfolio, which is composed of 82 stocks, is largely invested in the industrials, financial services and utilities sectors.

Disclosure: No positions.

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This article first appeared on GuruFocus.