Ric Dillon, chairman and portfolio manager of the $17.23 billion Diamond Hill Capital Management fund, dumped shares in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Apple Inc. (NASDAQ:AAPL) and increased the fund’s Amazon.com, Inc. (NASDAQ:AMZN) holding. The fund’s Q4 trades have recently been made public with the release of 13F forms filed with the SEC. The market has a keen interest in Dillon’s portfolio picks given his success at generating returns – he is ranked #34 out of 202 hedge fund managers tracked by TipRanks.
Indeed at 87.59% Diamond Hill’s measured performance beats the performance of both the average hedge fund portfolio (50.20%) and even the S&P 500 (84.40%). The fund, which is weighted towards the financial sector, made an average return of 21.61% last year and 17.70% over the last three years (annualized).
The fund’s investment philosophy is based on the principle that every share of stock has an intrinsic value, independent of its current market price. Where there is a clear divergence between the intrinsic value and the current market price, investing opportunities arise. The key is to identify the intrinsic value- Diamond Hill uses factors such as normalized earnings and earnings growth rate as well as payout ratios and dividends to calculate the predicted return for a given stock.
Bearing this in mind, let’s see how the fund traded three key stocks in Q4:
Valeant Pharmaceuticals Intl Inc
In Q4 Dillon slashed the fund’s holding in controversial pharmaceutical company Valeant by 90%. The remaining holding of just 34,500 shares has a value of $500,000, and this value has dropped by 15.7% since the last filing date. The divestment of Valeant shares is perhaps no surprise- bears in the market have accused Valeant of being in a state of controlled liquidation.
The company just announced that it has restructured $3 billion in debt and removed/ modified certain maintenance covenants. Following the news five-star Mizuho Securities analyst Irina Rivkind Koffler reiterated her sell rating on the stock with a bearish $9 price target (-26.47% downside from current share price). She says “While the refinancing is not surprising, it reflects the cloudy outlook on future earnings” and in particular suggests that growth in the underlying business is uncertain and/ or asset sales multiples may not be meeting previous targets.
According to financial accountability engine TipRanks the consensus rating on the stock is hold with 2 buy, 9 hold and 3 sell ratings. The consensus rating only from best-performing analysts is more depressing: moderate sell.
Dillon also cut the fund’s Apple holding by 7.7% to 2.6 million shares worth $300 million. Since the last filing prices have surged by 20% to new record highs making some investors wary that a correction could be around the corner. However, one analyst certainly not feeling the heat is five-star Drexel Hamilton analyst Brian White who believes that Apple is “one of the most underappreciated stocks in the world.”
He is confident about the upcoming iPhone release later this year, which is predicted to feature a radical redesign (including an OLED screen, although new leaks suggest that the screen will not be curved as previously suggested). According to White “new smartphones were unveiled by a host of other smartphone vendors [at the Mobile World Conference]; however, nothing that makes us concerned with Apple in 2017 and especially with the major upgrade we expect with the iPhone ‘X’.”
Consequently, White reiterated his buy rating on the stock with a very bullish price target of $185, 33% upside from the current share price of $139, and significantly above the average analyst price target of $146 on TipRanks which is only a 5% upside. The analyst is ranked #138 out of #4,517 analysts tracked by TipRanks.
In Q4 Dillon displayed a more confident outlook towards e-commerce giant Amazon. He increased the fund’s Amazon position by 90% to 823 shares worth $617,000. These shares have already gained 13.68% in value since the last filing date.
While Amazon is predominantly an e-commerce site, the company is not afraid of expanding its physical presence. Recent reports suggest that Amazon is planning to open bricks-and-mortar stores in India. AMZN is apparently seeking license under a June legislation that now allows 100% foreign direct investment (FDI) for companies that sell locally produced or sourced food items. Amazon is planning to invest $3 billion in India, as well as $2 billion previously announced in 2014.
As far as the US is concerned, Amazon has plans to open checkout- free brick-and-mortar stores called “Amazon Go” (the first one is Seattle is not yet open to the public) and is also about to open its tenth brick-and-mortar bookstore in Washington that will function as a showcase for Amazon products such as Amazon Echo.
The analyst consensus rating on Amazon is strong buy (an impressive 27 buy and 1 hold rating) while the average analyst price target of $941 represents a 10.4% upside from the current share price of $852.