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Yacktman Focused Fund Fuels Twenty-First Century Fox, Trims Several Positions

- By James Li

Stephen Yacktman and Jason Subotky, the managers of Yacktman Fund (Trades, Portfolio)s, seek long-term capital appreciation and current income. The fund managers invest in companies using a disciplined investment strategy combining good features of growth and value investing, as described in its prospectus. The fund targets companies that either have a good business or shareholder-oriented investment and trade at low prices. Additionally, the Fund uses the forward rate of return as discussed in this GuruFocus interview.


The Yacktman Fund (Trades, Portfolio) increased its position in Twenty-First Century Fox Inc. (FOXA) during the third quarter. However, the fund also trimmed several positions, including Proctor & Gamble Co. (PG), PepsiCo Inc. (PEP), Samsung Electronics Co. Ltd. (005935.KS), Cisco Systems Inc. (CSCO), Johnson & Johnson (JNJ) and Microsoft Corp. (MSFT).

Twenty-First Century Fox Inc.

Yacktman's focused fund purchased 2.26 million shares of FOXA at an average price of $25.57. With this transaction, the fund increased its portfolio 1.47% and owns 14.76 million shares of the media entertainment company.

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Fox currently has a financial strength rank of 5 and a profitability rank of 8, the latter suggesting that the company has high growth potential. Even though the company has satisfactory interest coverage, the company's Piotroski F-score is a moderately strong 6 out of 9, and its return on invested capital outperforms its WACC. The company has four good signs, including expanding operating margins and historically high dividend yield. Fox also has a price-to-book ratio and a price-to-sales ratio near a three-year low. The company's operating margin and Yacktman forward rate of return outperforms 83% and 97% of global diversified media companies respectively.

As the company has high growth potential, the Yacktman Fund (Trades, Portfolio) also increased its position in Fox. Jeff Ubben (Trades, Portfolio), director of Fox and CEO of ValueAct Holding LP, purchased 3 million shares as discussed in a previous article. The company's stock price rose 0.81% during the past 24 hours.

Proctor & Gamble

The focused fund axed 27.34% of its stake in Proctor & Gamble, selling 1.9 million shares at an average price of $86.85. With this transaction, the fund knocked off 4.02% of its portfolio.

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Although the company has a profitability rank of 6, the company's profit margins have contracted during the past 3-5 years. This usually suggests a potential value trap; however, the company is moderately overvalued based on its Peter Lynch chart and various valuation methods. Additionally, Proctor & Gamble's forward rate of return of 1.94% is near a 10-year low and underperforms 56% of companies in its industry.

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PepsiCo

Yacktman's focused fund reduced its position in PepsiCo quarter over quarter since the second quarter of 2014. The fund sold 700,000 shares in the latest quarter, about 22.58% of its position, trimming their portfolio by 1.86%.

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While the company has strong Piotroski F-scores and Altman Z-scores, PepsiCo's financial strength rank is still just 5 out of 10. This suggests that the soft-drink company has a modest business outlook. The company has issued $6.7 billion of long-term debt, and its interest coverage is near a 10-year low. Like Proctor & Gamble, PepsiCo is moderately overvalued based on its Peter Lynch chart. The company's forward rate of return is near a 10-year low of 3.6%, and underperforms 61% of competitive companies.

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Samsung

The focused fund dropped 7.98% of its stake in Samsung, trimming its portfolio by 1.27%. The consumer electronics company averaged 1,276,318.18 Korean won in the recent quarter.

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Likely due to its cancellation of the Galaxy Note 7, the company's per-share revenue has declined during the past three years. Although the company has strong financial strength and profitability, Samsung's price and price-to-sales ratio are both near a 10-year high. Additionally, the company's return on equity is near a 10-year low of 9.5%.

Cisco Systems

The fund has trimmed its Cisco Systems position since the third quarter of 2014, selling 900,000 shares in the most recent quarter at an average price of $30.76.

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The company has a four-star predictability rank, and its financial strength rank and profitability rank is 7 and 8, respectively. Cisco's profit margins are near a 10-year high and outperform 95% of global communication equipment companies. Additionally, the company has strong F, Z and M scores.

Although its financials suggest high growth potential, Cisco's price and price-to-sales ratio are near a five-year high and near a 10-year high, respectively, and the company's per-share revenue growth has decreased in the trailing 12 months. Additionally, the company has issued $12.3 billion of long-term debt over the past three years. As the company has downside potential, Steven Romick (Trades, Portfolio) axed 16.25% of his stake in Cisco.

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Johnson & Johnson

The focused fund trimmed its JNJ position by 7.69%, selling 150,000 shares at an average price of $121.32.

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The drug manufacturing company has a 3.5-star predictability rank on watch, a financial strength rank of 7 and a profitability rank of 8. However, Johnson & Johnson has seven medium warning signs, including slowed per-share revenue growth, historically low dividend yield and valuation ratios and increased long-term debt. Like Proctor & Gamble, JNJ is overvalued based on its Peter Lynch Chart and various valuation methods.

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Microsoft

Yacktman's focused fund reduced its position in Microsoft quarter over quarter since the second quarter of 2013. In the recent quarter, the fund sold 300,000 shares at an average price of $56.45.

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Like Proctor & Gamble, Microsoft is a potential value trap as its profit margins have declined. The company likely lost competitive power to tech giants like Apple Inc. (AAPL) and Alphabet Inc. (GOOG) (GOOGL). Due to decreasing revenue per share and operating loss, the company's earnings line has decreased during the past two years. The application software company's stock price increased since 2009 and has reached near a 10-year high. Although the company's profitability rank is 7 out of 10, Microsoft's three-year earnings-per-share growth is near a 10-year low of -12.2% and underperforms 67% of companies in its industry.

As the company has decreasing value potential, Steven Romick (Trades, Portfolio) pared his Microsoft position by 18.17%.

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See also

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Disclosure: The author has no position in any stock mentioned in this article.

This article first appeared on GuruFocus.