Tracking The Parnassus Core Equity Fund - Q2 2016 Update

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Includes: AAPL, AGN, AMAT, CMP, CVS, DE, DHR, DIS, EBAY, GILD, GOOG, GOOGL, INTC, IRM, MA, MDLZ, MDU, MKC, MSI, MU, NOV, NVS, NWN, PDCO, PEP, PG, PNR, PRGO, PX, PYPL, SCHW, SJR, STR, SYY, TRI, UPS, VFC, VRSK, WDFC, WFC, WM, XYL
by: V is for Value

Summary

Including dividends, total return for the 2nd quarter was 0.73% versus 2.45% for the S&P 500 and 3.38% for the Lipper Equity Income Fund Average.

The top 10 holdings (35.4% of fund): Danaher, Gilead Sciences, Google, Wells Fargo, United Parcel Service, Intel, Iron Mountain, Sysco, Mondelez, and Allergan.

During the second quarter the fund sold out of Pepsi, eBay, Northwest Natural Gas and Shaw Communications. It added Disney and Wells Fargo, making Wells its fourth largest position.

This series tracks the Parnassus Core Equity Fund (PRBLX, PRILX). I describe in the fund in a previous article, which you can find here, or you can check out their website here.

Over the past 10 years the fund returned 10.08% versus 7.73% for the S&P 500.

During the second quarter the fund posted a positive return but underperformed the S&P 500 due to its low exposure to energy stocks, the best performing sector of the quarter.

The underperformers for the quarter included Perrigo, Motorola Solutions and Apple. The fund added to both Perrigo and Apple over the second quarter.

The winners for the quarter included Iron Mountain, Mondelez and Micron Technology. The fund sold a little bit of Iron Mountain and made a minor addition to Micron. For Micron, it noted DRAM prices moved up in June for the first time in two years. It expects demand for DRAM to continue to outpace growth in production capacity.

The fund is still concerned over the fallout of Brexit, noting that the Euro may go lower and additional countries may leave the European Union, possibly Sweden and Denmark. The Netherlands and France are also seeing movements towards exiting the union.

The fund sold four positions over the quarter. Northwest Natural Gas and Pepsi were valuation calls. At their current prices the fund felt funds could be better deployed elsewhere. For Shaw the fund has lost confidence in the company's ability to maintain its competitive position. It's a similar situation for eBay where the fund believes it will be the number-two player next to Amazon.

The fund added two positions during the quarter, Disney and Wells Fargo. The fund bought Disney at an average price of $103 and believes any threats to ESPN can be offset by Disney's other businesses. The fund considers Wells Fargo the best large bank in the country and has been waiting many years for the right entry point. Right now it's trading at a slight discount to other regional banks and a significant discount to the overall stock market.

The fund is now neutral weight the financial sector, overweight industrials, and underweight energy and consumer discretionary. It was notably selling consumer goods stocks in the second quarter, selling out of Pepsi and lightening its positions in Mondelez, Procter & Gamble, and McCormick.

Here's the activity for the second quarter of 2016:

New Stakes:

Wells Fargo (NYSE:WFC) is one of the big four US money center banks and provides retail, corporate and commercial banking. The fund picked up nearly 10 million shares over the second quarter and made it the fourth largest position in the portfolio. The fund considers Wells the best large bank and it's trading at a significant discount to the overall market. The stock traded between $44.50 and $51 during the quarter. It's current priced under $49 so this is a good consideration for someone looking to emulate the fund.

Disney (NYSE:DIS) is a diversified media company and entertainment conglomerate headquartered in Burbank, CA. Notable properties include ESPN, ABC, and its theme parks. The fund bought over 3.7 million shares in the second quarter for a 2.81% stake in the portfolio. Per the fund commentary they paid an average price of $103. With Disney currently trading around $96 this is another good consideration if you want to emulate the fund.

Stake Increases:

Apple (NASDAQ:AAPL) is a consumer electronics company. The fund established its position in the 2nd quarter of 2013 at an average price of $395.02 (split adjusted $56.43). It likes the company for its strong cash flow, loyal customer base, innovation and the potential of new product categories. The position was trimmed by 13.1% in the third quarter of 2014. Prices ranged from $90 to $103. The fund sold more in the fourth quarter of 2014, 1.5 million shares, or roughly 38% of the position. Prices ranged from $96.26 to $119.00. In the fourth quarter of 2015 the fund added to Apple for the first time since 2013, buying 492k shares and boosting the position by 18%. Prices ranged from $105 to $123. Last quarter the fund bought another 697k shares, boosting the position by 21.5%. Prices ranged from $90 to $112.

Perrigo (NASDAQ:PRGO) is an OTC and generic drug manufacturer based out of Dublin, Ireland. The fund bought just over 1 million shares in the third quarter of 2014 with prices ranging from $139.00 to $158.85. The fund likes Perrigo because it's a play on two big trends; an aging population and the pressure to lower healthcare costs. The fund added another 840k shares over the fourth quarter of 2014. Prices ranged from $145.69 to $168.76. In the second quarter of 2015 the fund sold 760k shares, or 38% of its position. After the Mylan offer in early April 2015 the stock traded between $180 and $215. In the third quarter of 2015 the fund added 360k shares, boosting its position by 29%. Prices ranged from $151 to $197. The fund added nearly 1 million shares in the first quarter of 2016 as prices ranged from $124 to $151. It added another 1.2 million shares in the second quarter. Perrigo traded between $85 and $134. It's currently trading near its 52-week low at $93.

Alphabet (NASDAQ:GOOGL) is the major search engine player and generates over 80% of its revenue from advertising activity related to searches. The fund has owned Google since 2007. Over the fourth quarter of 2014 the fund bought 225k of the class C shares and 665k of the class A shares. Prices for the class C shares ranged from $495.39 to $577.35. Prices for the class A shares ranged from $498.16 to $587.78. The fund sold 28% of its class C shares during the third quarter as prices ranged from $515 to $675. Last quarter the fund added 67k of the class A shares, boosting that position by nearly 30%. Class A shares traded between $675 and $790.

Allergan (NYSE:AGN) develops pharmaceuticals and medical devices for therapeutic and cosmetic purposes. It's best known for Botox. The fund established a 2.3 million share position in the fourth quarter of 2013. Prices ranged from $88.48 to $111.08. The fund sold 845k shares, or 31% of its stake in the fourth quarter of 2014. Prices ranged from $176.86 to $214.00. In the first quarter of 2015 Actavis completed the acquisition of Allergan. Per the terms of the acquisition Allergan shareholders received 0.3683 of an Actavis ordinary share and $129.22 in cash for every share owned. The combined company also retained the Allergan name. Over the second quarter of 2015 the fund sold just over 615k shares, or 34.5% of the position as prices traded between $280 and $315. In the fourth quarter of 2015 the fund sold another 265k shares, reducing the position 22.7%. Prices ranged from $240 to $320. The fund used price weakness in the second quarter of 2016 to pick up 700k shares, upping its position by 70%. Allergan traded between $200 and $250 for the quarter.

Gilead Sciences (NASDAQ:GILD) is a pharmaceutical company with its core portfolio focused on HIV and hepatitis B and C. The fund first purchased Gilead in 2009 and built up the position to over 4 million shares by the end of 2010. The fund sold approximately 40% of the position in 2011 and another 10% in 2013. Since then the fund has been a buyer, owning 3.5 million shares at the end of 2015. During the first quarter of 2016 the fund added a million shares. Prices ranged from $82. To $100. And it added nearly 2.4 million shares in the second quarter, increasing its position by 53%. Gilead traded between $78 and $103.

Novartis (NYSE:NVS) is a pharmaceutical company operating in branded drugs, generics, and consumer products. The fund started buying Novartis in the third quarter of 2011, picking up 1.25 million shares. By the end of 2012 it owned 1.6 million shares. Prices were generally in the $55 to $60 range during this time. In 2013 it added 175k shares. Its last purchase was 675k shares in the second quarter of 2014 when prices traded between $82 and $91. The fund sold 450k shares in the fourth quarter of 2015, or roughly 19% of the position. Prices traded between $84 and $95. During the second quarter of 2016 the fund added 1.25 million shares, upping the position by 62%. Novartis traded between $70 and $83 during the quarter.

Charles Schwab (NYSE:SCHW), Patterson (NASDAQ:PDCO), and Micron Technology (NASDAQ:MU) saw minor (less than 20%) increases over the last quarter.

Stake Disposals:

Pepsico (NYSE:PEP) is a worldwide food and beverage company. The fund built its position in Pepsi in the first half of 2012, acquiring 3 million shares between prices of $62 and $70. Over 2013 the fund took some profits and trimmed the position about 27%. It was buying again in the first quarter of 2014, adding 495k shares when prices traded between $78 and $84. The fund added again in the second quarter of 2015, buying another 515k shares. Prices traded between $92.50 and $98.50. The fund sold its entire position over the second quarter as the stock traded between $100 and $107.

eBay (NASDAQ:EBAY) is an online marketplace and platform. The fund bought a little over 5 million shares for a 2.85% position in the portfolio in the third quarter of 2014. That made it the ninth largest position in the portfolio. Prices ranged from $50.18 to $56.63. The fund said it was buying in July, when the stock traded between $50.18 and $53.23. EBay was down on concerns over sales growth and the PayPal spin-off. The fund felt there was a compelling risk to reward profile in eBay. The fund added another 635k shares in the fourth quarter of 2014. They were at it again in the second quarter of 2015, adding just over 1 million shares, as prices traded between split adjusted prices of $23.25 to $26.50. The fund boosted the position another 25% in the third quarter of 2015, adding nearly 1.7 million shares. Prices traded between $23.50 and $29. The fund added nearly 2 million shares in the first quarter of 2016, boosting the position by over 20%. Prices traded between $21.50 and $27. The fund did an about face in the second quarter and liquidated the position. The stock traded between $22.50 and $26. The fund is probably kicking themselves over this one. eBay beat expectations when it reported second quarter results and the stock now trades over $31.

Shaw Communications (NYSE:SJR) provides broadband cable television, Internet, digital phone and other telecommunication services in the United States and Canada. The company operates in three segments: cable, satellite, and media. The fund first established a position in Shaw in 2012 picking up over 5.3 million shares. Prices ranged from $18.50 to $22.50 during the year. The position was built up to 6.2 million shares by the end of 2013 and just shy of 9 million at the end of 2014. The fund added another 3.1 million shares in the first quarter of 2015, bringing the total to just over 12 million. Prices ranged from $22.75 to $27. The fund sold 72% of its position in the first quarter of 2016, just over 8.6 million shares. Prices ranges from $16 to $19.50. The fund finished the job in the second quarter. Shaw traded between $18 and $20.

Northwest Natural Gas (NYSE:NWN) stores and distributes gas in the United States. The fund has owned Northwest for some time but it's always been a small position, less than 1% of the portfolio. The fund sold two thirds of its position over the first quarter of 2016 as Northwest was making new highs. Prices range from $49 to $54. The fund finished selling the position in the second quarter. Northwest traded between $49 and $65.

Stake Decreases:

Procter & Gamble (NYSE:PG) is a multinational consumer goods company known for popular brands such as Tide, Crest, and Gillette. This is a long-term holding of the fund. It owned 1.675 million shares at the end of 2010. It doubled the position over 2011 when the stock traded in the low $60's. Over 2014 the fund added another 900k shares and over 2015 it added another 1.2 million. The fund owned 5.4 million shares at the end of 2015. Since then the fund has been selling, shedding 944k shares in the first quarter and over 1.3 million shares in the second quarter. It now owns just over 3.1 million shares.

McCormick (NYSE:MKC) manufactures spices, herbs and flavorings for the retail and commercial markets. This is another long-term holding of the fund. It has owned between 1.7 and 2.5 million shares since 2010. It owned 2.5 million shares as of the end of 2015. The fund sold 875k shares over the second quarter, or 35% of its position. Prices ranged from $91 to $107.

Mondelez (NASDAQ:MDLZ) is a multinational food, beverage and confectionery company. The fund picked up the majority of its shares in 2013 when the stock traded between $26 and $35. It boosted its position roughly 20% over 2015 and ended the year with just over 10.7 million shares. During the last quarter the fund sold just over 2 million shares, 19% of its position, as prices traded between $39.50 and $45.50.

Xylem (NYSE:XYL) is a water and fluid technology company. The fund picked up the majority of its shares, 7.5 million, over 2013 when the stock traded in the mid-$20's. It added again over 2015 and held 9.9 million shares by the end of the year. In the second quarter the fund sold just over 2.4 million shares, roughly 25% of its position. Xylem traded between $0 and $46.50.

Iron Mountain (NYSE:IRM) saw a minor (less than 20%) decrease over the last quarter.

Kept Steady:

Compass Minerals (NYSE:CMP), Praxair (NYSE:PX), MasterCard (NYSE:MA), Paypal (NASDAQ:PYPL), Sysco (NYSE:SYY), WD-40 (NASDAQ:WDFC), Danaher (NYSE:DHR), Pentair (NYSE:PNR), Verisk Analytics (NASDAQ:VRSK), Alphabet (NASDAQ:GOOG), Deere (NYSE:DE), MDU Resources (NYSE:MDU), National Oilwell Varco (NYSE:NOV), CVS Healthcare (NYSE:CVS), VF Corp (NYSE:VFC), Applied Materials (NASDAQ:AMAT), Intel (NASDAQ:INTC), Thomson Reuters (NYSE:TRI), Motorola Solutions (NYSE:MSI), United Parcel Services (NYSE:UPS), Questar (NYSE:STR) and Waste Management (NYSE:WM) remained unchanged for the quarter.

PRBLX Q2 2016 Click to enlarge

Disclosure: I am/we are long AAPL, GOOGL, DIS, INTC, GILD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.