Bill Nygren Buys, Comments on 2 Stocks in Q4

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Feb 26, 2015
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Bill Nygren (Trades, Portfolio) manages the Oakmark Fund, which focuses on large-cap stocks in the U.S. It has returned 13.27% annualized since inception in 1991, compared to 9.65% for the S&P 500 benchmark index.

According to its literature, the managers “will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.”

Nygren’s portfolio contains 56 stocks, valued at $16.8 billion. He bought two new stocks in the fourth quarter: Chesapeake Energy Corp (CHK, Financial) and General Electric Co. (GE, Financial).

Chesapeake Energy Corp (CHK, Financial)

Nygren purchased 11 million shares of Chesapeake Energy in the fourth quarter, giving it 1.3% space in the portfolio. The company’s average share price was $21 for the quarter.

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Chesapeake Energy Corp was incorporated in Oklahoma in 1989. Chesapeake Energy Corp has a market cap of $11.96 billion; its shares were traded at around $17.98 with a P/E ratio of 23.0 and P/S ratio of 0.6. The dividend yield of Chesapeake Energy Corp stocks is 2.0%.

Nygren commented on the holding in his fourth quarter shareholder letter:

Chesapeake Energy is one of the largest oil and natural gas producers in the United States. The company has a storied history. Since its founding in 1989, it grew rapidly by acquiring acreage positions across North America’s largest resource plays. In our view, this growth left the company flush with high-quality assets, but financially overextended and operationally inefficient. During the past two years, the board of directors and the executive management team were replaced with new, shareholder-oriented leaders. This team began overhauling Chesapeake quickly by reducing leverage, simplifying the company’s financial structure and refocusing capital allocation on the highest return uses. In the past 18 months, Chesapeake has managed to spin off its non-core oilfield services business, sell billions of dollars of assets to reduce leverage, cut its capital spending budget by two-thirds and reduce general and administrative expenses by half. We believe these actions show that management’s focus has shifted away from acreage growth and toward maximizing shareholder returns. Chesapeake’s shares are trading at less than the company’s book value and at just 11x earnings per share. We see this as a bargain price for such high quality oil and gas assets run by what we believe is a strong, shareholder-friendly management team.

General Electric Co. (GE, Financial)

Nygren purchased 10.5 million shares of General Electric, representing 1.6% of the portfolio. General Electric’s stock price averaged $26 per share for the quarter.

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General Electric Co. was incorporated in 1892. The company is a diversified infrastructure and financial services company. General Electric Co. has a market cap of $260.19 billion; its shares were traded at around $25.91 with a P/E ratio of 19.70 and P/S ratio of 1.79. The dividend yield of General Electric Co. stocks is 3.5%.

Nygren also commented on the holding in his fourth quarter shareholder letter:

General Electric is a company with businesses we have always admired, but we have questioned management’s focus on returns when making capital allocation decisions. However, the appointment of a new CFO in mid-2013 ushered in significant changes. Since then, GE has, in our view, acquired assets cheaply (Alstom) and sold assets at good prices (Synchrony and its appliances division). In 2015 the company plans to totally revamp its variable compensation plan for thousands of employees, emphasizing factors that drive return on invested capital, which should boost future results. We believe there is substantial opportunity to improve gross margins, and the stock trades for just under a market multiple on 2016 earnings. Some investors may have a stale opinion of GE after the past 15 years of persistent underperformance, but we believe it’s a good investment at the current price.

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