Seeking Alpha
Research analyst, growth at reasonable price, newsletter provider, Top 300 fund picks
Profile| Send Message|
( followers)  

Summary: Ruane, Cunniff & Goldfarb Inc., led by Chairman and CEO Robert D. Goldfarb, manages over $14 billion in assets, including $10.5 billion in U.S. equity investments. It is best known by its flagship Sequoia Fund that earned a phenomenal 15.61% annual return or 24,600% cumulative return over 38 years between 1970 and 2008. Recently, its managers were commended as the top fund managers for 2010 by Morningstar. Two attractive buys from its portfolio include Valeant Pharmaceuticals (NYSE:VRX) and Mohawk Industries Inc. (NYSE:MHK) and two conviction sells include Idexx Laboratories Inc. (NASDAQ:IDXX) and Concur Technologies Inc. (NASDAQ:CNQR).

New York -based Ruane, Cunniff & Goldfarb Inc., led by Chairman and CEO Robert D. Goldfarb, manages over $14 billion in assets, including $10.5 billion in U.S. equity investments. The firm is best known as the investment advisor and distributor of its flagship $4.5 billion Sequoia Fund that is rated five stars and ranked in the top two percentile in its class by Morningstar. In the 38 years between fund inception in 1970 and March 2008, the average annual total return of the fund was 15.61% or 24,600% cumulative. In the last three years, through the market turmoil, the fund has still returned a respectable 5.17% ranking it in the top fourth percentile in its category and earning its portfolio managers Goldfarb and Poppe commendation as Morningstar Top Fund Managers for 2010.

Founder William J. Ruane was a personal friend to Warren Buffett and a disciple of the Graham's value investing techniques. In fact, when Ruane started the fund in 1970, Buffett is known to have advised associates to invest with Ruane after Buffett closed out his partnership. The fund focuses primarily on common stocks, both U.S. and foreign, that it believes are undervalued at the time of purchase and have the potential for growth, based on the firm's appraisal of each investments' fundamental value as determined by its balance sheet and earnings history and prospects going forward.

The fund holds a moderately diversified portfolio of 77 positions, with approximately a third of its holdings equally distributed between large-caps, mid-caps and small-caps. Its portfolio turnover is 30%-35% implying an average holding period of three years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight healthcare (26%), services (23%) and financial (21%) sectors and it is under-weight technology (7%), energy (3%), utility (0%) and transportation (0%) sectors, compared to the weighting of these sectors in the overall economy.

The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter and updated based on any 13-G filings since the end of the quarter:

  • Healthcare sector: Sell Idexx Laboratories Inc. (IDXX) and Buy Valeant Pharmaceuticals (VRX). Ruane cut $190 million from its prior $2.9 billion prior quarter position, including cutting $187 million from its $767 million prior quarter position in Idexx Laboratories, Inc. (IDXX), a developer of products and services for the veterinary, production animal, water testing and dairy markets. Also, subsequent to the end of the March 2011 quarter, they filed a form SC-13G further cutting its position in IDXX by an additional $46 million. The position in IDXX was opened in the mid-$20s at the end of 2003, so the selling of a portion of this position in the high-$70s last quarter is profit-taking. IDXX currently trades at a premium forward price-to-earnings (P/E) of 28, at the top end of its historic P/E trading range and the stock has rallied over five-fold in the last ten years. Furthermore, analyst targets in the mid-$70s to $80 do not leave much upside from current levels and while growth is expected to continue in the low single-digits in revenue and earnings, much of that growth may already have been factored into the rally and the stock is behaving like it has formed a short-term top after peaking above $80. Furthermore, Ruane sold only a minor $8 million from its largest $1.83 billion position in Valeant Pharmaceuticals (VRX) that develops primarily branded drugs to treat central nervous system disorders, pain and cardiovascular disease. The position in VRX was initiated in the mid-teens in mid-2010 and Ruane currently holds a significant 12.3% of the outstanding shares. While the stock has gone up three-fold in the last year and more than five-fold since the low in the 2008/09 crisis, there may still be additional upside in the stock. The company's product portfolio comprises approximately 490 products and analysts have been upbeat about the company, projecting that earnings will continue rising to $2.79 in the fiscal year ended December 2011, well above the $1.73 generated in the prior fiscal year 2010 and they will rise even more to $3.29 in the fiscal year ending December 2012. At the mid-$50s, VRX has formed a long-term technical base hitting the mid-$50s all-time high from 2001, so it would be quite natural for it to consolidate here and correct say 15%-20%. We would look to buy VRX into the mid-$40s and accumulate it on the way down if it corrects more.
  • Energy sector: Ruane sold $50 million of its $400 million prior quarter position, including adding $19 million in oil and natural gas exploration and production company Sandridge Energy Inc. (NYSE:SD), selling $37 million of its $48 million position in integrated oil and gas company Exxon Mobil Corp. (NYSE:XOM) and selling $19 million in oil and gas exploration and production company Pioneer Natural Resource (NYSE:PXD).
  • Service sector: Ruane added a minor $30 million to its prior quarter $2.4 billion position, including adding $78 million to its $345 million position in Advance Auto Parts Inc. (NYSE:AAP), an operator of 3,563 retail auto parts stores in 39 states, Puerto Rico and the Virgin Islands and balancing that with a cutting of $21 million from its $42 million position in Education Management LP (NASDAQ:EDMC), a provider of post-secondary education to over 136,000 students via 101 locations in 31 states and Canada. The position in AAP was opened in the low-$40s in the summer of 2009, so the selling of a partial position in the mid-$60s last quarter is probably profit-taking. AAP has corrected steeply since the end of the March 2011 quarter and currently trades mid-range at a 13 forward P/E based on fiscal year 2011 earnings estimates. The position in EDMC was opened in the low-$20s at the end of 2009, so the selling of half its position in the high-teens last quarter is indicative of its lack of conviction in the position. In the service sector, Ruane also holds a large $737 million or 7.7% of the outstanding shares of Fastenal Co. (NASDAQ:FAST) that operates 2,490 construction supply stores offering fasteners, bolts, nuts, studs washers and other products. Ruane opened this position in the $8 range in mid-2001, so while they sold $4 million of that last quarter, it is more important that they still maintain such a large position after a four-fold gain. FAST trades at a forward P/E of 28, near the top of its P/E range. Furthermore, analyst targets are in the $30-$35 range, so even if the company continues to outperform, it is a less attractive buy here.
  • Consumer cyclical sector: Buy Mohawk Industries Inc. (MHK). Ruane holds its fourth largest position in this sector in Mohawk Industries Inc., a manufacturer of floor covering products for residential and commercial applications in the U.S. and Europe. It owns 13.1% of the outstanding shares of MHK, valued at $508 million. The position in MHK was opened in the $30 range in mid-2001. The stock has gone as high as $108 in 2007 and as low as $18 in 2009, so Ruane's holding a large position in the stock through such volatility is indicative of its conviction in this position. MHK trades at a reasonable 15 time forward P/E based on fiscal year December 2012 earnings, about the mid-range compared to its historic P/E range. Earnings are projected to grow almost 30% in 2011 and another 20%+ in 2012 and there could be even more upside to these numbers if the economy recovers strongly. Furthermore, analyst targets for the stock are in the mid-$60s to mid-$70s, making MHK an attractive buy at these levels.
  • Financial sector: Ruane cut $25 million from its $2.13 billion prior quarter position, including cutting a minor $14 million from its huge $1.22 billion position in Warren Buffet's Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B).

Table

Company

Ticker

Action

Market Value at end of March 2011 Quarter

Change in Value from Prior Quarter

Percent of Portfolio

Percent Shares Owned

New 13G 5% Ownership Filing Since End of March 2011 Quarter

Idexx Labs Inc.

IDXX

Cut

$ 533 million

($234) million

4.16%

11.13%

Top Buys and Sells

Advance Auto Parts Inc.

AAP

Add

$ 423 million

$78 million

3.77%

8.28%

Exxon Mobil Corp.

XOM

Cut

$ 13 million

($37) million

0.12%

0.00%

Concur Technologies Inc.

CNQR

Cut

$ 51 million

($28) million

0.46%

1.71%

Education Management Corp.

EDMC

Cut

$ 21 million

($21) million

0.19%

0.76%

Sandridge Energy Inc.

SD

New

$ 19 million

$19 million

0.17%

0.37%

Pioneer Natural Resources

PXD

Cut

$ 31 million

($19) million

0.27%

0.26%

Berkshire Hathaway Inc.

BRK.A

Cut

$ 1211 million

($14) million

11.90%

1.18%

Ultimate Software Group Inc.

ULTI

Cut

$ 35 million

($13) million

0.32%

2.33%

EOG Res Inc.

EOG

Cut

$ 71 million

($12) million

0.63%

0.22%

TJX Cos Inc.

TJX

Add

$ 866 million

$11 million

7.71%

4.51%

Top Holdings

Valeant Pharmaceuticals Intl.

VRX

Cut

$ 1831 million

($8) million

16.30%

12.33%

Fastenal Co.

FAST

Cut

$ 737 million

($4) million

13.13%

7.71%

Mohawk Industries Inc.

MHK

Cut

$ 508 million

($2) million

4.53%

12.10%

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 our ‘opinions' and we may be wrong. We 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 our 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.

Source: 2 Buys and 2 Sells From Value Investor Ruane Cunniff of Sequoia Fame