Jeremy Grantham ( Trades , Portfolio ), chairman of Grantham, Mayo, Van Otterloo & Co., is regarded as a knowledgeable investor in various stock, bond and commodity markets. During fourth-quarter 2016, Grantham trimmed positions in Proctor & Gamble Co. ( PG ), Cisco Systems Inc. ( CSCO ), Microsoft Corp. ( MSFT ) and Qualcomm Inc. ( QCOM ).
Proctor & Gamble
Grantham sold 3,100,701 shares of Proctor & Gamble, nearly 99% of his stake in the company. P&G's stock price averaged $85.23 during fourth-quarter 2016, and the company currently trades at $88.10 per share.
Although P&G's profit margins and returns outperform close to 90% of competitors, the company has negative three-year revenue, EBITDA and earnings per share growth rates, suggesting decreasing growth potential.
P&G reported modest earnings performance in its fiscal second-quarter, including flat net sales compared to the prior-year quarter. Organic sales increased 2% overall, offset by a -2% impact from foreign exchange. Additionally, the company's diluted earnings per share from continuing operations declined 8% from the prior-year quarter. For fiscal 2017, P&G expects its all-in sales to be on par with fiscal 2016 sales: although the company expects organic sales to grow by 2-3%, the headwinds from foreign exchange and minor brand divestitures offset the organic sales growth.
As the company's price, price-book ratio and price-sales ratio are all near a 10-year high, P&G is significantly overvalued. The company's current price is close to its maximum price-sales valuation based on its P/S valuation bands chart. P&G is also overvalued based on several other valuation methods, including the earnings power value method and the projected free cash flow method.
Grantham axed 26.15% of his stake in Cisco Systems, selling 6,169,165 shares at an average price of $30.49. With this transaction, the fund manager trimmed 0.92% off his portfolio.
Cisco has a profitability rank of 9 and a four-star predictability rank, which normally suggests high growth potential. Despite having profit margins near a 10-year high, Cisco has returns on equity below its 10-year average. Additionally, the company's per-share revenue growth has slowed down, with a one-year revenue growth rate of -0.2%.
For fiscal first-quarter 2017, Cisco reported revenues of $12.4 billion, net income of $2.3 billion and diluted earnings of 46 cents per share. Net income and diluted earnings declined 4% from the prior-year quarter while revenues increased just 1%. CEO Chuck Robbins expressed that Cisco, despite a "challenging global business environment," still managed to lead customers in digital transformations through "highly secure, automated and intelligent solutions."
Although management gave positive remarks about the company's performance, Cisco expects to have weaker earnings performance for fiscal second-quarter, including a normalized revenue decline of 2% to 4% year over year (not including SP Video CPE Business revenues from fiscal second-quarter 2016). The company also expects fiscal second-quarter EPS to fall within 42 cents to 47 cents, suggesting a potential decrease in earnings for the upcoming quarter.
As the company has low earnings potential in the short term, several gurus reduced their position in Cisco Systems. Tweedy Browne (Trades, Portfolio) knocked off 9.34% while Steven Romick (Trades, Portfolio) trimmed 8.93%. John Hussman (Trades, Portfolio) axed 58.96% of his Cisco position, selling all but 104,400 shares.
Grantham removed 17.45% of his Microsoft position, selling 2,981,525 shares at an average price of $60.15. With this transaction, the guru trimmed his portfolio 0.81%.
Although Microsoft reported strong cloud revenues during fourth-quarter 2016, deeper analysis of the company's historical profitability and growth metrics suggests a modest financial outlook for early 2017. Microsoft's operating margins, despite outperforming 89% of global infrastructure companies, is currently near a 10-year low of 19.41%. Additionally, Microsoft's five-year average operating margin growth rate and gross margin growth rate are -10.30% and -4.80%, despite the company having gross margins of about 58.90%.
PRIMECAP Management (Trades, Portfolio), who currently owns the largest number of Microsoft shares among gurus, pared 5.21% off its stake.
Grantham reduced his Qualcomm position 17.89%, selling 1,482,356 shares at an average price of $67.18. With the transaction, the guru trimmed his portfolio 0.48%.
On a non-GAAP basis, Qualcomm reported good earnings performance in fiscal first-quarter 2017 compared to the prior-year quarter. Despite this, Qualcomm had a poor quarter based on GAAP results, with operating income, net income and diluted earnings per share declining about 54% year-over-year and 57% from the prior quarter. The GAAP values included an $868 million accrued expense for fiscal first-quarter 2017 related to the Korea Free Trade Commission investigation.
Qualcomm's operating margin is near a 10-year low of 21.37% despite outperforming 93% of global semiconductor companies. The company's operating margin declined 5% on average for the past five years. Additionally, Qualcomm's gross margin declined 2.6% on average.
While Qualcomm's three-year average buyback rate outperforms 97% of competitors, the company bought back the overvalued shares. Qualcomm's stock price is trading about 17.2% lower than the average buyback price. The company also issued about $11.7 billion in long-term debt within the past three years.
Disclosure: I do not have positions in the stocks mentioned in this article.
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This article first appeared on GuruFocus .