Bill Nygren
is portfolio manager at the Oakmark Funds, a firm with $6.1
billion in assets under management that has returned 12.29% to
investors since inception. Nygren likes to buy stocks at a
significant discount to their intrinsic values and is a big fan
of share repurchases as opposed to stocks with above-average
yields, as those currently tend to be fully priced. He also
believes that largest businesses are tending to be priced at a
discount today.
In the second quarter, Oakmark bought three new companies for its
portfolio: Devon Energy Corporation (
DVN
), American International Group (
AIG
) and Aon Plc (
AON
).
Devon Energy (
DVN
)
Bill Nygren
purchased 1.4 million shares of Devon Energy at an average price
of $63 in the second quarter of 2012. The holding accounts for
1.4% of his portfolio, and the stock price has declined 8% from
the average price.
Devon Energy Corporation is an independent energy company engaged
primarily in oil and gas exploration, development and production,
and in the acquisition of producing properties. Devon Energy
Corporation has a market cap of $23.39 billion; its shares were
traded at around $58.29 with a P/E ratio of 12.3 and P/S ratio of
2. The dividend yield of Devon Energy Corporation stocks is 1.4%.
Nygren's thoughts on the company are clear since he commented on
the purchase in his
second quarter letter
:
Devon Energy (DVN-$58)
Devon is a North American oil and natural gas exploration and
production company. The stock has been a poor performer, down
from a high of $94 last year and an all-time high of $127 in
2008. With nearly 60% of its reserves in natural gas, Devon is
widely perceived to be a gas company, and its stock price has
traded down with natural gas prices. However, 80% of Devon's
revenues and over 80% of our business value estimate stem from
the company's oil and liquids business. Based on our estimates,
the stock is now trading at just over half of its 2013 asset
value. And we are not assuming any oil price recovery in our
numbers. An additional reason we are attracted to Devon is the
way management allocates capital. It seems that most oil and gas
managements have a "bigger is better" mentality. Devon instead
focuses on per-share value. In the past two years, Devon has used
excess cash to reduce its share base by 10%. Selling at less than
10x expected earnings, at half of estimated asset value, and with
a history of repurchasing its shares, we are pleased to add Devon
to our portfolio.
American International Group (
AIG
)
Nygren bought 2.1 million shares of AIG at an average price of
$31 in the second quarter. The stock has gained 10% since.
American International Group Inc., world leaders in insurance and
financial services, is the international insurance organization
with operations in more than 130 countries and jurisdictions.
American International Group Inc. has a market cap of $61.59
billion; its shares were traded at around $34.43 with a P/E ratio
of 17.8 and P/S ratio of 1.
Nygren also commented on AIG in his
second quarter letter
:
American International Group (AIG-$32)
AIG is a large insurance company operating in both property and
casualty (Chartis) and life (SunAmerica). It is a poster child of
the financial crisis, having required over $180 billion in
government aid, and the government still owns over half of its
outstanding shares. While the rescue measures still dampen its
current valuation, we believe AIG has made remarkable progress
under the leadership of CEO Robert Benmosche. The government
loans have been completely repaid, and the stock currently trades
above the government's breakeven point of $29. Two years ago, we
found it almost impossible to estimate the value of AIG's equity.
The analysis involved guessing at proceeds from sales of
businesses and valuing large, opaque, levered loan portfolios.
Today the analysis is the same as it would be for any insurer:
What is its future earnings outlook? How good are its reserves?
How will its capital be invested? Chartis went through a
difficult period of writing unprofitable business just to grow
revenues. That has stopped, and we believe that for the past
several years Chartis has focused on only writing profitable
business even if growth suffers. Reserves have been boosted to a
level that we think is consistent with other high-quality
insurers. Capital is being invested primarily in share repurchase
-- with AIG selling at just over half of book, this is nicely
accretive to the company's per-share book value. We believe that
AIG should earn over $3 per share this year and is on track to
earn in excess of $5 per share within a few years. We believe
that AIG is priced as if its future looks like its past. We
expect the current discount to other insurers will diminish as
the memory of the financial crisis fades.
AIG reported $2.3 billion in net income in the second quarter,
compared to net income of $1.8 billion in the second quarter of
2011. Book value per common share increased 5% during the quarter
to $60.58. The company also purchased $7.1 billion of Maiden Lane
III Assets year-to-date.
Aon Plc (
AON
)
Nygren bought 1.3 million shares of Aon at an average price of
$48. The stock has increased 9% from the average price since
then.
Aon Plc provides risk management services, insurance and
reinsurance brokerage and human resource consulting and
outsourcing. Aon Plc has a market cap of $16.96 billion; its
shares were traded at around $52.16 with a P/E ratio of 14.2 and
P/S ratio of 1.5. The dividend yield of Aon Plc stocks is 1.2%.
Aon Plc had an annual average earnings growth of 6.5% over the
past 10 years.
Nygren commented on Aon stock in his second quarter letter:
AON Corporation (AON-$47)
As one of only three insurance brokers with a global platform,
AON's market position should allow the company to directly
benefit from global economic growth. AON stock surpassed $50 in
2007 when it earned just over $2 per share. In 2012, after a
restructuring that improved margins, AON is expected to earn over
$4 per share after adding back goodwill amortization from recent
acquisitions. Despite the growth in earnings and the potential
for further margin improvement, the stock has been stagnant. As a
result, the P/E ratio for AON has fallen from 25 times in 2007 to
11 times now, slightly less than the P/E ratio for the S&P
500. Unlike the insurance business, insurance brokerage is not
capital intensive. Therefore, we believe AON has the ability to
return most of its earnings to shareholders through share
repurchases and dividends. An additional feature we value is
AON's potential to generate meaningful interest income. AON, as a
fiduciary, holds its clients' capital for a short period of time
before it is turned over to the insurance companies. With today's
low short-term interest rates, there is little opportunity to
generate returns on that capital. We don't believe short-term
rates will stay low forever and like getting the option for more
rapid earnings growth when rates increase.
In the second quarter, Aon repurchased 5.3 million of its shares
for approximately $250 million, and authorized a $5 billion share
repurchase program on April 19, 2012 to replace its old program,
of which it has $4.7 billion of remaining authorization.
Nygren also sold out his small position in Cisco (
CSCO
), likely at a loss, and made a significant gain on a small
holding of Tyco International (
TYC
). Other stocks he exited include EnCana (
ECA
), H&R Block (
HRB
) and Allstate Corp. (
ALL
).
See Bill Nygren's portfolio here. Also check out the Undervalued
Stocks, Top Growth Companies and High Yield stocks of Bill
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