Top Undervalued Earnings Rebound Plays Bought By Arnold Schneider In Q1

by: GuruFundPicks

Wayne, PA-based investment adviser Schneider Capital Management, headed by Chief Investment Officer Arnold Schneider, manages over $1.8 billion in two equity mutual funds, Schneider Value Fund and Schneider Small Cap Value Fund, and in separately managed accounts. The firm was founded by Arnold Schneider in 1996, and it employs a disciplined, deep-value investing approach to picking its investments. Based on the latest SEC 13-Ffor Q1 2012 filed last week, the fund holds $1.23 billion in 13-F assets in a moderately diversified portfolio of over 120 positions. The firm has invested a quarter of its holdings in large-caps, 30%-35% in mid-caps, and the remaining 40%-45% in small-cap equities.

We analyzed Schneider's Q1 13-F to determine its highest conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are two of its bullish positions in Q1 2012, that trade undervalued compared to the peers in their respective groups, and also have analysts projecting strong earnings recovery for them going forward (see Table):

Marriott International Inc. (NASDAQ:MAR): MAR operates, franchises and licenses hotels and furnished corporate housing properties worldwide. Schneider added a new $17 million position in Q1. Other leading institutions making large bullish bets on MAR in Q1 include mutual fund powerhouse Fidelity Investments adding 1.2 million shares to its 0.1 million share prior quarter position, and Franklin Resources adding a new 1.3 million share position.

MAR shares have been among the top performers in the lodging group, up about 33% YTD, recovering from a multi-year slump after the 2008-09 recession. In the latest Q1 (March), the company missed on revenues and beat slightly on earnings (30c v/s 29c). However, analysts are projected strong earnings growth looking forward, mostly from margin growth, from $1.37 in 2011 to $2.00 in 2013 at 20.8% annual rate, based on the expectation that demand will rise as the economy recovers while the supply remains constrained due to the lack of investment in the industry since the recession. MAR shares currently trade at 18-19 forward P/E compared to the 29.7 average for its peers in the lodging group.

Genworth Financial Inc. (NYSE:GNW): GNW is a leading U.S.-based international insurance company offering life and long-term care insurance, annuities, asset management services and mortgage insurance worldwide. Schneider added $3 million in Q1 to its $1 million prior quarter position. Other leading institutions making large bullish bets on GNW in Q1 include New York-based Bank of New York Mellon Corp., with over $1.2 trillion in assets under management, adding 3.3 million shares to its 4.7 million share prior quarter position, and Morgan Stanley adding 2.6 million shares to its 2.0 million share prior quarter position.

GNW reported its Q1 (March) earlier this month, on May 2nd, missing on both analyst revenue and earnings estimates. Its shares currently trade at 3-4 forward P/E, at the bottom of its historic P/E range, and also well below the average of 9.3 for its peers in the life insurance group, while earnings are projected to increase at 95.3% annual rate from 38c in 2011 to $1.45 in 2013. Also, GNW trades at a P/B ratio of 0.2 and a PSR of 0.2, both well below the averages of 0.7 and 0.7 respectively for its peers. Furthermore, Wall Street analysts have a mean price target on GNW of over $9, well above the current $5 price.

The following are additional stocks that Schneider is bullish about, accumulating shares in them in Q1 2012 (see Table):

  • Arch Coal Inc. (NYSE:ACI), that is engaged in the production of steam and metallurgical coal from surface and underground mines, in which it added $12 million in Q1 to its $29 million prior quarter position; and
  • Peabody Energy Corp. (NYSE:BTU), engaged in coal production and sale through 28 operations in the U.S. and Australia, in which it added $4 million in Q1 to its $31 million prior quarter position.

The following are Schneider's bearish picks, based on its Q1 selling activity (see Table):

  • PNC Financial Services Group (NYSE:PNC), that operates as a diversified financial services company, offering retail banking, corporate and institutional banking, asset management and residential mortgage banking services, via 2,470 branches in PA, NJ, DE, Washington D.C., and 10 other states, in which it cut $8 million in Q1 from its $18 million prior quarter position;
  • Consol Energy Inc. (NYSE:CNX), a producer of bituminous coal and coal-bed methane gas, primarily in the northern and central Appalachian and Illinois basins, in which it cut $6 million in Q1 from its $31 million prior quarter position;
  • department store chain operator JC Penney Inc. (NYSE:JCP), in which it cut $4 million in Q1 from its $6 million prior quarter position;
  • First Horizon National Corp. (NYSE:FHN), that is a holding company for First Tennessee Bank that operates via 184 financial centers in TN, GA and MS, in which it cut $4 million in Q1 from its $24 million prior quarter position;
  • Lincoln National Corp. (NYSE:LNC), a diversified financial services company, offering life insurance and long-term care protection, annuities, individual and group retirement plans, and group benefits, in which it cut out completely its $4 million prior quarter position;
  • Firstenergy Corp. (NYSE:FE), that is a diversified energy services holding company that provides electricity and natural gas services, as well as energy management and other energy-related services in OH, PA, NJ, WV, and MD, in which it cut $3 million in Q1 from its $10 million prior quarter position;
  • KB Home (NYSE:KBH), a builder of single-family attached and detached homes, townhomes and condominiums in nine states across the U.S., in which it cut $3 million in Q1 from its $29 million prior quarter position; and
  • Huntington Bancshares Inc. (NASDAQ:HBAN), which operates as the holding company for the Huntington National Bank that provides commercial and consumer banking services via 611 offices in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, Kentucky and Florida, in which it cut $2 million in Q1 from its $28 million prior quarter position.


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Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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