Bill Nygren (Trades, Portfolio) is the manager of the Oakmark Fund, Select Fund, and Global Select Fund. In 2001, Morningstar named him the Domestic Stock Manager of the Year.
In the Oakmark Fund’s fourth quarter letter, Nygren wrote that he and co-manager Kevin Grant believe the financial and information technology sectors are the most attractive, and therefore these sectors comprise more than half of the portfolio’s assets.
During the fourth quarter, the fund purchased two new holdings and sold out of five positions.
General Electric (GE, Financial)
Nygren picked up 10,500,000 shares of GE, which traded for an average of $25.68 during the quarter. The new holding has a 1.6% portfolio weighting.
In his fourth quarter letter, Nygren wrote GE was a company the firm had admired but questioned the management’s focus on returns when making decisions about capital allocation. However, GE appointed a new CFO, Jeffrey Bornstein, who Nygren says has acquired assets cheaply and sold others a good prices. In 2016, he believes GE will have a good opportunity to increase gross margins.
Over the past five years, EBIT per share has declined 0.8% and was $2.55 in FY 2013.
Looking at the balance sheet, GE has a comfortable current ratio of higher than 1, and has also been gradually paying off long-term debt. The following chart shows the debt trend over the years.
The stock currently trades at $26.05 with a P/E ratio of 19.3 and P/S ratio of 1.75.
Chesapeake Energy (CHK, Financial)
Nygren’s other purchase of the quarter was 11,000,000 shares of Chesapeake Energy for an average price of $20.78 per share. The stock has a 1.3% portfolio weighting.
Nygren writes in the fourth quarter letter that, in Chesapeake’s early days, the company rapidly acquired acreage positions, which left the company with high-quality assets but overextended and inefficient. Since then, a new shareholder-friendly management has reduced leverage, simplified the financial structure, and focused capital allocation on high-return uses. Oakmark sees Chesapeake as a bargain price for high quality oil and gas assets.
And indeed, the stock has declined 26% over the past year, with a P/E ratio of 25.4 and P/S ratio of 0.64.
According to the Peter Lynch chart, the stock may be slightly overvalued.
After a tough 2012 with negative EBIT per share, earnings rebounded in FY 2013 at $3.17.
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