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The Top 6 Buys of John Rogers' Ariel Investments

Ariel Investments leader John Rogers (Trades, Portfolio) released his firm's first-quarter portfolio this week, listing 12 new holdings.

The guru's Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.


With these criteria in mind, Ariel's top six buys for the quarter were Envista Holdings Corp. (NYSE:NVST), Vail Resorts Inc. (NYSE:MTN), Charles Schwab Corp. (NYSE:SCHW), Discover Financial Services (NYSE:DFS), Bristol-Myers Squibb Co. (NYSE:BMY) and Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH).

Envista Holdings

The firm invested in 3.5 million shares of Envista Holdings, allocating 0.91% of the equity portfolio to the stake. The stock traded for an average price of $25.83 per share during the quarter.

The Brea, California-based company, which manufactures a variety of dental products, has a $2.53 billion market cap; its shares were trading around $15.81 on Friday with a price-earnings ratio of 14.58, a price-book ratio of 0.72 and a price-sales ratio of 0.89.

The Peter Lynch chart suggests the stock is fairly valued as the price-earnings ratio is near a one-year low.

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GuruFocus rated Envista's financial strength 5 out of 10. While the company has a comfortable level of interest coverage, it is below its historical average. In comparison, the cash-debt ratio is outperforming versus its history but is below more than 80% of the players in its industry.

The company's profitability scored a 4 out of 10 rating, driven by margins and returns that are outperforming over half of its competitors but are low in regard to its historical performance. GuruFocus also warns that Envista's revenue per share has declined over the past 12 months.

Of the gurus invested in Envista, Rogers' firm has the largest position with a 2.19% stake. Other top guru shareholders are Barrow, Hanley, Mewhinney & Strauss, the Vanguard Health Care Fund (Trades, Portfolio) and Ron Baron (Trades, Portfolio).

Vail Resorts

The firm picked up 312,781 shares of Vail Resorts, dedicating 0.81% of the equity portfolio to the position. Shares traded for an average price of $216.65 each during the quarter.

The ski resort operator, which is headquartered in Broomfield, Colorado, has a market cap of $6.73 billion; its shares were trading around $166.95 on Friday with a price-earnings ratio of 22.86, a price-book ratio of 4.79 and a price-sales ratio of 2.85.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 3 out of 10 supports this assessment.

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Vail Resorts' financial strength was rated 4 out of 10 by GuruFocus. Although the company has issued approximately $414.3 million in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 2.01, however, indicates the company is under some financial pressure since it has recorded a loss in operating income and assets are building up at a faster rate than revenue is growing.

The company's profitability fared much better, scoring an 8 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6, which suggests conditions are stable. Vail Resorts also has a business predictability rank of one out of five stars. GuruFocus says companies with this rank typically return an average of 1.1% per annum over a 10-year period.

With an 11.29% stake, Baron is the company's largest guru shareholder. Diamond Hill Capital (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), the FPA Capital Fund (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) also have positions in the stock.

Charles Schwab

Ariel entered a 761,173-share holding of Charles Schwab, giving it 0.45% space in the equity portfolio. During the quarter, the stock traded for an average per-share price of $42.23.

The San Francisco-based financial services company has a $42.54 billion market cap; its shares were trading around $33.11 on Friday with a price-earnings ratio of 12.91, a price-book ratio of 1.81 and a price-sales ratio of 4.08.

Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank of 7 out of 10 also leans toward undervaluation as its price ratios are all near multiyear lows.

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Weighed down by the addition of around $4.4 billion in new long-term debt over the past several years, GuruFocus rated Charles Schwab's financial strength 4 out of 10. Its assets are also building up at a faster rate than revenue is growing, which indicates it may be becoming less efficient.

The company's profitability scored a 5 out of 10 rating, driven by margins and returns that outperform over half of its competitors. It also has a one-star business predictability rank.

Dodge & Cox is the company's largest guru shareholder with a 7.86% stake. Other top guru investors include Al Gore (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Diamond Hill, Frank Sands (Trades, Portfolio), Baron, First Eagle Investment (Trades, Portfolio), Pioneer, the Parnassus Endeavor Fund (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies and Jeremy Grantham (Trades, Portfolio).

Discover Financial

Having previously divested of a position in Discover Financial in the second quarter of 2019, the firm opened a new 283,404-share holding. The trade had an impact of 0.18% on the equity portfolio. During the quarter, the stock traded for an average price of $66.96 per share.

Headquartered in Riverwoods, Illinois, the financial services company, which offers checking and savings accounts, personal loans, home equity loans, student loans and credit cards along with operating Discover Bank, has a market cap of $11.8 billion; its shares were trading around $38.88 on Friday with a price-earnings ratio of 5.82, a price-book ratio of 1.31 and a price-sales ratio of 1.06.

The Peter Lynch chart and the GuruFocus valuation rank of 9 out of 10 suggest the stock is undervalued.

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Discover Financial's financial strength was rated 3 out of 10 by GuruFocus on the back of a low cash-debt ratio of 0.38, which is underperforming in relation to both its history and its industry.

With a score of 5 out of 10, the company's profitability did not fare much better. Its margins and returns, however, outperform over half of its industry peers. Discover Financial also has a one-star business predictability rank.

PRIMECAP is the Discover Financial's largest guru shareholder with a 3.88% stake. Other top guru investors are Hotchkis & Wiley, Pioneer, NWQ Managers (Trades, Portfolio), Simons' firm, Diamond Hill, Joel Greenblatt (Trades, Portfolio), John Hussman (Trades, Portfolio) and George Soros (Trades, Portfolio).

Bristol-Myers Squibb

Rogers' firm purchased 134,506 shares of Bristol-Myers Squibb, giving the holding 0.13% space in the equity portfolio. Shares traded for an average price of $61.34 each during the quarter.

The New York-based biopharmaceutical company has a $147.17 billion market cap; its shares were trading around $64.93 on Friday with a price-earnings ratio of 79.45, a price-book ratio of 2.91 and a price-sales ratio of 3.92.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 3 out of 10 also supports this assessment as the share price and price-earnings ratio are at multiyear highs.

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GuruFocus rated Bristol-Myers Squibb's financial strength 5 out of 10. Despite having issued around $16.4 billion in new long-term debt over the past three years, it is at a manageable level since the company has sufficient interest coverage. The Altman Z-Score of 1.9, however, indicates the company may be under some stress since its assets are building up faster than revenue is growing. The return on invested capital is also below the weighted average cost of capital, suggesting low profitability.

Boosted by an expanding operating margin and strong returns that outperform a majority of competitors, the company's profitability scored an 8 out of 10 rating. Bristol-Myers Squibb also has a moderate Piotroski F-Score of 4. The one-star business predictability rank is on watch, however.

Of the gurus invested in Bristol-Myers Squibb, Simons' firm has the largest position with 2.92% of outstanding shares. Vanguard, Dodge & Cox, PRIMECAP, Pioneer, Richard Pzena (Trades, Portfolio), NWQ, the T Rowe Price Equity Income Fund (Trades, Portfolio), Kahn Brothers (Trades, Portfolio), Greenblatt and manyother gurus also own the stock.

Norwegian Cruise Line Holdings

Ariel Investments bought 668,008 shares of Norwegian Cruise Line, expanding the equity portfolio0.13%. The stock traded for an average per-share price of $40.98 during the quarter.

The cruise line operator, which is headquartered in Miami, has a market cap of $2.87 billion; its shares were trading around $10.99 on Friday with a price-earnings ratio of 2.6, a price-book ratio of 0.37 and a price-sales ratio of 0.38.

Based on the Peter Lynch chart, the stock is undervalued.

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Norwegian's financial strength was rated 4 out of 10 by GuruFocus on the back of low interest coverage and around $376.2 million in new long-term debt. The low Altman Z-Score of 0.9 warns the company could be in danger of going bankrupt. The WACC also outweighs the ROIC, indicating poor profitability.

The cruise line's financial strength fared better, scoring a 9 out of 10 rating on the back of operating margin expansion, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. Due to steady earnings and revenue growth, the company has a perfect five-star business predictability rank. According to GuruFocus, companies with this rank typically record an average return of 12.1% per year.

With a 2.59% stake, Sarah Ketterer (Trades, Portfolio) is the company's largest guru shareholder. Other top guru investors are PRIMECAP, Barrow, Hanley, Mewhinney & Strauss, Simons' firm, Baron, Pioneer, Steven Cohen (Trades, Portfolio) and Greenblatt.

Additional trades and portfolio performance

During the quarter, Rogers also disclosed the firm took positions in Check Point Software Technologies Ltd. (NASDAQ:CHKP), OneSpaWorld Holdings Ltd. (NASDAQ:OSW), Cisco Systems Inc. (NASDAQ:CSCO), SEI Investments Co. (NASDAQ:SEIC), The Middleby Corp. (MIDD) and Booking Holdings Inc. (BKNG).

Ariel Investments' $5.7 billion equity portfolio, which is composed of 149 stocks, is largely invested in the financial services (19.2%), communication services (14.83%) and health care (14.35%) sectors.

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In its first-quarter commentary, the firm revealed the Ariel Fund returned -35.14% during the quarter. The fund posted a return of 24.67% in 2019, underperforming the S&P 500's 31.49% return.

Disclosure: No positions.

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This article first appeared on GuruFocus.