Bill Nygren is portfolio manager of The Oakmark Fund, The Oakmark Select Fund, and the Oakmark Global Select Fund. He has more than 30 years of experience in the segment.
Bill Nygren and his partners are value investors, and they invest in companies that they believe trade at a substantial discount to what they consider to be the true business value. They believe that, over time, the price of a stock will rise to reflect the value of the underlying company.
In evaluating potential investments, they focus on the following characteristics: A company's stock price and whether it is a significant discount to their estimate of underlying business value, free cash flows and intelligent investment of excess cash, and a high level of manager ownership. They look at each purchase as if they are buying a piece of a business, and not just a stock certificate.
Nygren believes that a concentrated portfolio is superior to a more diversified portfolio because each investment thus has a more “meaningful impact of investment performance.” He says: “Focusing on long-term investing minimizes competition and allows the firm to focus on core business characteristics that drive growth and value.”
The firm utilizes in-house research in conjunction with company visits and industry analysis to render a more complete report of prospective investments. A bottoms-up approach is utilized to analyze investments in greater depth, with macroeconomics and market sentiment discarded due to Nygren’s style.
Bill Nygren thinks it is important to avoid value traps while practicing value investing. "A value trap is defined by disappointing fundamentals rather than a disappointing stock price," he added. "It's one of the risks of value investing." "The stock keeps getting cheaper and the outlook keeps getting worse."
His top stocks are the following:
GlaxoSmithKline PLC (GSK, Financial): GlaxoSmithKline ranks as one of the largest companies by market capitalization in the pharmaceutical industry. The company conducts its might across multiple therapeutic classes, including cardiovascular, metabolic, respiratory, neurological, and antiviral, as well as vaccines and consumer products. Prescription drug and vaccine sales account for close to 80% of total sales.
GlaxoSmithKline has used its vast resources to create the next generation of medicines. The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat.
Glaxo ranks in the top tier of the pharmaceutical industry. It has created multiple opportunities for new blockbuster drugs thanks to its resources.
In terms of quarter results, total sales increased 3% operationally. On the bottom line, earnings per share increased 1% year over year as higher costs — largely due to an unfavorable mix of lower-margin products — weighed on earnings growth.
Glaxo is well-positioned in developing orphan drugs, which tend to carry strong pricing power and usually face less competition. The strong purchase power has been triggered by the launch of new vaccines and pipeline drugs.
Glaxo is one of the best-positioned pharmaceutical companies to emerging markets. This should definitely help drive growth over the long term.
Merck & Co Inc. (MRK, Financial): Merck & Co. Inc. is a global research-driven pharmaceutical company dedicated to putting patients first. It was established in 1981 and it discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs.
The company greatly improved its long-term outlook by acquiring Schering-Plough at a moment of increasing competition, patent losses and a pipeline of late-stage drugs with poor chances of approval. This purchase enables Merck to achieve $3.5 billion in annual cost- saving synergies. In addition, new product launches of Isentress and Januvia pushed to a strong start, and delays of competing drugs have given Merck a leg up in maintaining market leadership.
Merck has a good combination of strong free cash flow generation and manageable financial leverage. As regards the former, it is expected to average 31.3% in the coming years. Last year, total debt-to-EBITDA was 1.7 and debt-to-book capitalization was 24.7%. The dividend yield stands at 4.9%.
Bristol-Myers Squibb Company (BMY, Financial): Bristol-Myers Squibb discovers, develops, and markets pharmaceuticals for various indications, such as cardiovascular and infectious diseases, cancer, and psychiatric disorders. Moreover, Bristol has exited several nonpharmaceutical businesses to focus on branded drugs.
Bristol generates ample free cash flow and should have no trouble covering its obligations. Furthermore, the company cut $2.5 billion in operating costs and is planning further cuts, which should help the company prepare for the difficult 2012-15 period, when patents will expire on Plavix, Avapro and Abilify.
Bristol's diabetes drug Onglyza exhibits similar attributes as Merck's MRK Januvia, which is approaching $4 billion in annual sales. Cancer drugs also carry strong pricing power.
In terms of patent losses, most of them occurred in primary care indications, which allows the company to drastically cut the related selling and marketing expenses during the drug's loss of exclusivity.
H&R Block Inc. (HRB, Financial): H&R Block Inc. is a diversified company involved in tax return preparation, electronic filing of income tax returns and other tax-related services. Its subsidiaries are engage in offering investment services through broker-dealers, originating, purchasing, servicing, selling and securitizing mortgages, offering personal productivity software, purchasing participation interests in refund anticipation loans made by a third-party lender, and offering accounting, tax and consulting services to business clients.
Building more value into its core retail tax preparation services through better branch office efficiency and improved customer service has been a key focus for the firm, which has helped curb its recent losses in market share. H&R Block is emphasizing its do-it-yourself product to a greater degree than it has in the past, which should help stem its market share losses.
Encana Corp (ECA, Financial): Engages in the exploration and production of natural gas in the United States and Canada. At the end of 2010, the company reported proved reserves of 13.9 trillion cubic feet of natural gas equivalent, based on forecast prices and costs. Daily production averaged approximately 3.5 billion cubic feet of natural gas equivalent in the third quarter of 2011 at a ratio of 96% gas to 4% liquids.
Encana's size has allowed it to attract external capital from foreign investors and minimize the impact of cost inflation from drilling rig and service providers.
Furthermore,Encana maintains a hedging policy of 50% of current-year production and 25% of the following two years' production to protect cash flows. The company has a mandate: maintain debt levels below two times EBITDA and 40% of total capital.
As regards future expectations, Encana's emerging liquids-rich and oil focused plays will help triple liquids production by 2015, and improve returns.
Bill Nygren and his partners are value investors, and they invest in companies that they believe trade at a substantial discount to what they consider to be the true business value. They believe that, over time, the price of a stock will rise to reflect the value of the underlying company.
In evaluating potential investments, they focus on the following characteristics: A company's stock price and whether it is a significant discount to their estimate of underlying business value, free cash flows and intelligent investment of excess cash, and a high level of manager ownership. They look at each purchase as if they are buying a piece of a business, and not just a stock certificate.
Nygren believes that a concentrated portfolio is superior to a more diversified portfolio because each investment thus has a more “meaningful impact of investment performance.” He says: “Focusing on long-term investing minimizes competition and allows the firm to focus on core business characteristics that drive growth and value.”
The firm utilizes in-house research in conjunction with company visits and industry analysis to render a more complete report of prospective investments. A bottoms-up approach is utilized to analyze investments in greater depth, with macroeconomics and market sentiment discarded due to Nygren’s style.
Bill Nygren thinks it is important to avoid value traps while practicing value investing. "A value trap is defined by disappointing fundamentals rather than a disappointing stock price," he added. "It's one of the risks of value investing." "The stock keeps getting cheaper and the outlook keeps getting worse."
His top stocks are the following:
GlaxoSmithKline PLC (GSK, Financial): GlaxoSmithKline ranks as one of the largest companies by market capitalization in the pharmaceutical industry. The company conducts its might across multiple therapeutic classes, including cardiovascular, metabolic, respiratory, neurological, and antiviral, as well as vaccines and consumer products. Prescription drug and vaccine sales account for close to 80% of total sales.
GlaxoSmithKline has used its vast resources to create the next generation of medicines. The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat.
Glaxo ranks in the top tier of the pharmaceutical industry. It has created multiple opportunities for new blockbuster drugs thanks to its resources.
In terms of quarter results, total sales increased 3% operationally. On the bottom line, earnings per share increased 1% year over year as higher costs — largely due to an unfavorable mix of lower-margin products — weighed on earnings growth.
Glaxo is well-positioned in developing orphan drugs, which tend to carry strong pricing power and usually face less competition. The strong purchase power has been triggered by the launch of new vaccines and pipeline drugs.
Glaxo is one of the best-positioned pharmaceutical companies to emerging markets. This should definitely help drive growth over the long term.
Merck & Co Inc. (MRK, Financial): Merck & Co. Inc. is a global research-driven pharmaceutical company dedicated to putting patients first. It was established in 1981 and it discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs.
The company greatly improved its long-term outlook by acquiring Schering-Plough at a moment of increasing competition, patent losses and a pipeline of late-stage drugs with poor chances of approval. This purchase enables Merck to achieve $3.5 billion in annual cost- saving synergies. In addition, new product launches of Isentress and Januvia pushed to a strong start, and delays of competing drugs have given Merck a leg up in maintaining market leadership.
Merck has a good combination of strong free cash flow generation and manageable financial leverage. As regards the former, it is expected to average 31.3% in the coming years. Last year, total debt-to-EBITDA was 1.7 and debt-to-book capitalization was 24.7%. The dividend yield stands at 4.9%.
Bristol-Myers Squibb Company (BMY, Financial): Bristol-Myers Squibb discovers, develops, and markets pharmaceuticals for various indications, such as cardiovascular and infectious diseases, cancer, and psychiatric disorders. Moreover, Bristol has exited several nonpharmaceutical businesses to focus on branded drugs.
Bristol generates ample free cash flow and should have no trouble covering its obligations. Furthermore, the company cut $2.5 billion in operating costs and is planning further cuts, which should help the company prepare for the difficult 2012-15 period, when patents will expire on Plavix, Avapro and Abilify.
Bristol's diabetes drug Onglyza exhibits similar attributes as Merck's MRK Januvia, which is approaching $4 billion in annual sales. Cancer drugs also carry strong pricing power.
In terms of patent losses, most of them occurred in primary care indications, which allows the company to drastically cut the related selling and marketing expenses during the drug's loss of exclusivity.
H&R Block Inc. (HRB, Financial): H&R Block Inc. is a diversified company involved in tax return preparation, electronic filing of income tax returns and other tax-related services. Its subsidiaries are engage in offering investment services through broker-dealers, originating, purchasing, servicing, selling and securitizing mortgages, offering personal productivity software, purchasing participation interests in refund anticipation loans made by a third-party lender, and offering accounting, tax and consulting services to business clients.
Building more value into its core retail tax preparation services through better branch office efficiency and improved customer service has been a key focus for the firm, which has helped curb its recent losses in market share. H&R Block is emphasizing its do-it-yourself product to a greater degree than it has in the past, which should help stem its market share losses.
Encana Corp (ECA, Financial): Engages in the exploration and production of natural gas in the United States and Canada. At the end of 2010, the company reported proved reserves of 13.9 trillion cubic feet of natural gas equivalent, based on forecast prices and costs. Daily production averaged approximately 3.5 billion cubic feet of natural gas equivalent in the third quarter of 2011 at a ratio of 96% gas to 4% liquids.
Encana's size has allowed it to attract external capital from foreign investors and minimize the impact of cost inflation from drilling rig and service providers.
Furthermore,Encana maintains a hedging policy of 50% of current-year production and 25% of the following two years' production to protect cash flows. The company has a mandate: maintain debt levels below two times EBITDA and 40% of total capital.
As regards future expectations, Encana's emerging liquids-rich and oil focused plays will help triple liquids production by 2015, and improve returns.
