Muhlenkamp’s Firm Buys Equity Commonwealth, Dumps 2 Stocks

Summary

  • The firm sold out of Biogen and Invitae.
  • It reduced holdings of Cameco and MasTec MTZ .

Muhlenkamp & Co. Inc., the investment firm founded by Ronald Muhlenkamp (TradesPortfolio), released its portfolio for the third quarter earlier this month.

While he is still acting as the firm’s chairman, Muhlenkamp passed most operational responsibilities on to his sons in 2019. With the goal of maximizing returns through capital appreciation, as well as income from dividends and interest, his Wexford, Pennsylvania-based firm typically invests in highly profitable companies trading at a discount. When picking stocks, it seeks companies with strong balance sheets and high returns on equity. The firm believes that, over time, stock prices reflect the companies’ underlying value and that the long-term business of investing offers a higher chance of profitability and reliability.

In his quarterly letter to shareholders, Muhlenkamp noted “the economic noise hasn’t abated” as a new wave of the Covid-19 virus slowed the economic recovery and “exacerbated the problems in global supply chains.”

“While some shortages have been alleviated (lumber comes to mind) other shortages remain problematic (semiconductors for the auto industry, for example). Global transportation systems are still overwhelmed resulting in longer shipping times internationally and higher costs,” he wrote. “Interestingly, late in the third quarter we began to see reports of energy shortages in a variety of countries: natural gas prices in Germany have more than tripled, there was a shortage of gasoline in England, power was curtailed to businesses in Northern China, etc. There is no single cause for the energy problems but it is interesting that they all cropped up simultaneously.”

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Based on these considerations, the firm disclosed it entered one new position, sold out of two stocks and trimmed a slew of other existing holdings during the three months ended Sept. 30. The most notable trades included a new position in Equity Commonwealth (EQCFinancial), the divestment of Biogen Inc. (BIIBFinancial) and Invitae Corp. (NVTAFinancial) and reductions of the Cameco Corp. (CCJFinancial) and MasTec Inc. (MTZFinancial) holdings.

Equity Commonwealth

After exiting a position in Equity Commonwealth (EQCFinancial) during the second quarter, the firm entered a new 112,943-share holding, allocating it to 1.13% of the equity portfolio. The stock traded for an average price of $26.31 per share during the quarter.

The Chicago-based real estate investment trust has a $3.07 billion market cap; its shares were trading around $25.50 on Tuesday with a price-book ratio of 1 and a price-sales ratio of 53.73.

The GF Value Line VALU suggests the stock is significantly overvalued currently based on its historical ratios, past performance and future earnings projections.

GuruFocus rated Equity Commonwealth’s financial strength 10 out of 10. In addition to having no long-term debt currently, the robust Altman Z-Score of 56.67 indicates the company is in good standing.

The company’s profitability scored a 5 out of 10 rating on the back of negative margins and returns on equity, assets and capital that underperform a majority of competitors. Equity Commonwealth also has a moderate Piotroski F-Score of 4 out of 9, indicating operations are typical for a stable company, but the predictability rank of one out of five stars is on watch as a result of revenue per share declining over the past five years. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Equity Commonwealth, John Rogers (TradesPortfolio) has the largest stake with 1.24% of its outstanding shares. Other top guru shareholders include Jim Simons (TradesPortfolio)’ Renaissance Technologies, Chuck Royce (TradesPortfolio), Steven Scruggs (TradesPortfolio), Caxton Associates (TradesPortfolio), Charles Brandes (TradesPortfolio), Pioneer Investments and Murray Stahl (TradesPortfolio).

Biogen

Impacting the equity portfolio by -2.31%, Muhlenkamp’s firm sold all 18,218 shares of Biogen (BIIBFinancial). During the quarter, shares traded for an average price of $328.16 each.

GuruFocus estimates the firm gained 32.37% on the investment, which was established in the first quarter of 2016.

The biotech company, which is headquartered in Cambridge, Massachusetts, has a market cap of $34.68 billion; its shares were trading around $236.07 on Tuesday with a price-earnings ratio of 23.1, a price-book ratio of 3.33 and a price-sales ratio of 3.22.

According to the GF Value Line, the stock is fairly valued currently.

Biogen’s financial strength was rated 5 out of 10 by GuruFocus on the back of adequate interest coverage and an Altman Z-Score of 3.28 that indicates the company is in good standing. The return on invested capital also overshadows the weighted average cost of capital, meaning value is being created as the company grows.

The company’s profitability scored a 9 out of 10 rating. Although the operating margin is in decline, Biogen is supported by strong returns that top a majority of industry peers, a moderate Piotroski F-Score of 5 and a 3.5-star predictability rank that is on watch as a result of revenue per share declining over the past 12 months. GuruFocus says companies with this rank return an average of 9.3% annually.

With an 11.07% stake, PRIMECAP Management (TradesPortfolio) is the company’s largest guru shareholder. The Vanguard Health Care Fund (TradesPortfolio), Simons’ firm, Pioneer Investments, the Parnassus Endeavor Fund (TradesPortfolio), the T Rowe Price Equity Income Fund (TradesPortfolio) and Ken Fisher (TradesPortfolio), among others, also have positions in Biogen.

Invitae

The guru’s firm exited its 6,390-share position in Invitae (NVTAFinancial), impacting the equity portfolio by -0.08%. The stock traded for an average per-share price of $29.39 during the quarter.

Established during the second quarter, the firm lost an estimated 9.98% on the investment according to GuruFocus.

The San Francisco-based company, which provides genetic testing services for medical purposes, has a $3.66 billion market cap; its shares were trading around $15.88 on Tuesday with a price-book ratio of 1.21 and a price-sales ratio of 8.17.

Based on the GF Value Line, the stock appears to be a potential value trap, so investors should do their due diligence before making a decision.

GuruFocus rated Invitae’s financial strength 4 out of 10. The Altman Z-Score of 0.74 warns the company could be at risk of bankruptcy if it does not improve its liquidity. Assets are also building up at a faster rate than revenue is growing, indicating it may be becoming less efficient.

The company’s profitability fared even worse, scoring a 2 out of 10 rating. Although the operating margin is expanding, the returns are negative and underperform a majority of competitors. Invitae also has a low Piotroski F-Score of 3, meaning business conditions are in poor shape, while revenue per share has been declining for the past 12 months.

Catherine Wood (TradesPortfolio) is Invitae’s largest guru shareholder with an 11.45% stake. Fisher, Mario Gabelli (TradesPortfolio) and Baillie Gifford (TradesPortfolio) also have positions in the stock.

Cameco

With an impact of -0.03% on the equity portfolio, the firm decreased its Cameco (CCJFinancial) position by 1%, sellling 3,810 shares. During the quarter, the stock traded for an average price of $18.96 per share.

The firm now holds 375,775 shares total, which represent 3.14% of the equity portfolio. GuruFocus data shows it has gained around 45.84% on the investment since establishing it in the fourth quarter of 2016.

The Canadian company, which is the world’s largest publicly traded producer of uranium, has a market cap of $8.94 billion; its shares were trading around $21.20 on Tuesday with a price-book ratio of 2.22and a price-sales ratio of 6.92.

The GF Value Line suggests the stock is significantly overvalued currently.

Cameco’s financial strength and profitability were both rated 5 out of 10 by GuruFocus. In addition to steady debt-related ratios, the company has a high Altman Z-Score of 3.59 that indicates it is in good standing.

The company is being weighed down by negative margins, but returns beat slightly over half of its industry peers. Cameco also has a low Piotroski F-Score of 3. The one-star predictability rank is on watch as a result of revenue per share declining over the past five years.

Of the gurus invested in Cameco, Brandes has the largest holding with 0.81% of its outstanding shares. Pioneer Investments, Primecap, Louis Moore Bacon (TradesPortfolio) and several other gurus also own the stock.

MasTec

Muhlenkamp’s firm trimmed its position in MasTec (MTZFinancial) by 0.42%, selling 541 shares. The transaction had an impact of -0.02% on the equity portfolio. During the quarter, shares traded for an average price of $94.99 each.

It now holds 128,634 shares total, accounting for 4.26% of the equity portfolio and is now the 10th-largest holding. The firm has gained an estimated 120.53% on the investment according to GuruFocus.

The infrastructure engineering and construction company, which is headquartered in Coral Gables, Florida, has a $6.63 billion market cap; its shares were trading around $89.31 on Tuesday with a price-earnings ratio of 18.01, a price-book ratio of 2.91 and a price-sales ratio of 0.83.

According to the GF Value Line, the stock is significantly overvalued currently.

GuruFocus rated MasTec’s financial strength 5 out of 10. While the company has adequate interest coverage, the Altman Z-Score of 3.33 indicates it is in good standing. The ROIC also eclipses the WACC, so value creation is occurring.

The company’s profitability scored a 7 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 5. Driven by steady earnings and revenue growth, MasTec also has a two-star predictability rank. GuruFocus data shows companies with this rank return an average of 6% annually.

With 0.88% of outstanding shares, Richard Pzena (TradesPortfolio) is MasTec’s largest guru shareholder. Other guru investors are Simons’ firm, Steven Scruggs (TradesPortfolio), Bacon and Lee Ainslie (TradesPortfolio).

Additional trades and portfolio performance

Other positions Muhlenkamp’s firm curbed during the quarter included Bristol-Myers Squibb Co. (BMYFinancial), Berkshire Hathaway Inc. BRK.A (BRK.BFinancial), Microsoft Corp MSFT . (MSFTFinancial), CVS CVS Health Corp. (CVSFinancial) and Schlumberger Ltd SLB . (SLBFinancial).

Over half of the firm’s $260 million equity portfolio, which is composed of 33 stocks, is invested in the technology, industrials and health care sectors.

According to the firm’s website, the Muhlenkamp Fund returned 11.86% in 2020, slightly underperforming the S&P 500’s 18.4% return.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com.

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