Hedge Fund Guru Donald Smith's Top New Conviction Buys and Sells

Includes: AUY, DDS, IM, JBLU, MU, RE, TM, TSO
by: GuruFundPicks
New York-based registered investment adviser Donald Smith & Co., headed by Chief Investment Officer Donald G. Smith, manages over $3 billion in value equity accounts for tax-exempt and taxable funds, and high net worth individuals. They are a deep-value manager employing a strict bottom-up approach, and generally investing in out-of-favor companies selling in the bottom decile of price-to-tangible book value ratios, and that have a significant earnings potential over the next 2-4 years. Their managed value equity products range across the equity capitalization range from Large Cap to Micro Cap, the common factor being the employment of their deep-value equity approach. They have generated 15.3% compound annualized return over the past 30 years, and over the last 10 years they have returned 12.1% compound annualized return for their investors versus 0.4% for the S&P 500.
The fund holds a moderately diversified portfolio of 91 positions, and over 55% of their holdings are in mid-caps, 40%-45% are in small-cap equities, and large-caps account for less than 2% of their holdings. Their portfolio turnover is around 20% implying an average holding period of five years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that their portfolio is over-weight in the Transportation, Utilities, Basic Materials and Services Sectors, and it is under-weight the Healthcare, Energy and Industrials Sectors.
Within Sectors, on a more disaggregated level, my prior analysis of their SEC 13-F filings for the December 2010 quarter had revealed that they were over-weighted in the Utilities Sector, the Airline Industry, the Insurance Industry, the Semiconductor Manufacturing Industry Group, and the Transportation Industry Group (ex-Airline). Based on a review of the most recent SEC 13-F filing for the March 2011 quarter, we determined that they have actually increased their holdings in each of the above groups and continue to be over-weight in all of them.
The following summarizes their new picks and pans in the latest reported 13-F filing for the March 2011 quarter:
  • Tesoro Corp. (NYSE:TSO) is engaged in the refining and marketing of petroleum products in the mid-continental and western U.S. Donald Smith cut his prior position by half during the quarter, selling $105 million worth. This position was initiated in the quarter ended September 2009 probably in the $15 range, and with the stock selling at over $28 recently they were sitting on almost a double in less than two years, so the selling of half the position while significant is just normal profit taking and not a conviction sell.
  • JetBlue Airways Corp. (NASDAQ:JBLU) provides point-to-point passenger airline service to 60 cities in 20 states, Puerto Rico, Caribbean and Latin America. This is a high conviction buy for Donald Smith. They added $65 million to their position during the quarter and now own $184 million worth or almost 10% of the company, having initiated the position in 2009 at prices slightly below current levels.
  • Dillards Inc. (NYSE:DDS) operates 308 department stores in 29 states, offering home furnishings and apparel. This is another high conviction buy for Donald Smith. They added $43 million to their position during the quarter and now own $190 million or more than 9% of the company, having initiated the position in 2000 at prices in the teens and continuing to accumulate even at higher prices.
  • Everest Re Group Ltd. (NYSE:RE) offers property and casualty reinsurance and insurance products in the U.S., Bermuda and other International markets. Donald Smith added $28 million to their position and now own $71 million worth of stock in this company. They initiated this position in the quarter ended June 2010 probably in the $70s and their willingness to accumulate even more shares at higher levels makes this a conviction buy.
  • Micron Technology Inc. (NASDAQ:MU) manufactures DRAM, non-volatile flash memory, and image sensors used in computers, servers and consumer electronics. Donald Smith added over $3 million during the quarter, and they now own $180 million or just over 2% of the company. They initiated the position in 2005, and with the stock trading lower since then, it would seem that they have been on the ‘wrong’ side of this position and as such their position in the stock does not carry much informative value.
  • Yamana Gold Inc. (NYSE:AUY) is a Canadian company engaged in the exploration and development of gold properties in South America and Mexico. Donald Smith added $5 million during the quarter, and they now own $142 million or just below 2% of the company. The stock has done quite well since they initiated the position in late 2008 in the low single digits, currently trading near $12. As such, their accumulating more shares at these higher levels while sitting on a three-fold gain represents a high conviction buy.
  • Ingram Micron CLA (NYSE:IM) distributes networking hardware and software, computer systems, and peripherals via 100 centers worldwide. Donald Smith initiated the position in March 2010 and added $12 million so that they now own $133 million or 4% of the company. Anything over 5% is typically considered significant ownership, and their willingness to add to their already near-significant stake in the company makes this a conviction buy.
  • Toyota Motor Corp. ADR (NYSE:TM) is a Japanese manufacturer of automobiles under the Toyota, Lexus and Daihatsu nameplates. Their $21 million new position initiation during the quarter is both small relative to their portfolio size as well as in terms of the $128 billion market-cap of Toyota.
New or Increased or Decreased or Unchanged Position
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Top New Picks and Pans
Tesoro Corp.
$ 104.84 million
$ 104.93 million
JetBlue Airways Corp.
$ 184.04 million
$ 64.9 million
Dillards Inc.
$ 190.17 million
$ 43.49 million
Everest Re Group Ltd.
$ 71.31 million
$ 28.05 million
Toyota Motor Corp.
New Position
$ 21.03 million
$ 21.03 million
Largest Holdings
Micron Technology Inc.
$ 180.41 million
$ 3.69 million
Yamana Gold Inc.
$ 142.33 million
$ 5.33 million
Ingram Micro Inc.
$ 132.81 million
$ 11.9 million
Click to enlarge
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.