Bill Nygren is a classic value investor who has helmed the Oakmark Select Fund (MUTF:OAKLX) for nearly 30 years. Since inception, he has generated total returns of nearly 12% compared to 9.8% returns for the S&P 500. The fund has some $6.3 billion in assets under management.
Recently he sounded the alarm that the benchmark index is not the diversified investment it has historically been. In an interview with CNBC, Nygren said the fund has become dominated by tech stocks, and only four or five of them account for most of the S&P’s performance.
Although Nygren does not avoid tech stocks — Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) is the Select Fund’s second largest position — he prefers investing in out of favor companies, especially those who use excess capital to buy their own stock. Because there aren’t as many value investors around to “force convergence to fair value anymore,” he likes companies that take matters into their own hands through share repurchases.
Since most investors have become growth investors, and typically buy into stocks that have already gone up in value, it creates opportunities for true value investors to pick up good companies that generate a lot of cash flow and use it to invest in themselves.
Below are two companies Nygren bought in the third quarter, representing the largest increases in his positions in the stock.
Agriculture equipment manufacturer Deere (NYSE:DE) has largely gone nowhere for the past three years, with shares up just 8% compared to a 26.5% gain for the S&P 500. Although operationally it had a strong 2023, the stock actually lost 7% and only gained 6% last year. This market laggard is a solid company, though, with a 35-year history of paying dividends to shareholders.
Deere has been buying back stock every quarter for at least the past 10 years, but between 2022 and 2024 amped up its repurchases by buying back $1 billion or more stock for eight consecutive quarters. In the third and fourth quarters of its fiscal 2024 year, it still made sizable purchases of $812 million and $788 million.
In December 2022, Deere’s board authorized the buyback of up to $18 billion worth of stock and at the end of fiscal 2024, still had almost $9 billion remaining on the program. It’s clear why Nygren likes DE stock.
The billionaire investor began buying Deere in the first quarter last year and hasn’t stopped. Most recently he increased his holdings by 29.4% by buying 237,000 shares at an average price of $417.33 per share so that it represents 7% of Oakmark Select’s total portfolio. He now owns some 1.04 million shares.
While Wall Street has a consensus one-year price target of $444 per share, implying 8% upside, Truist Financial analysts raised their target just last month to $550 per share, suggesting 34% upside potential.
The stock that saw the biggest increase in share count by Nygren was oil and gas exploration and production stock APA (NYSE:APA), which has been beaten down even more than Deere due to soft energy pricing. APA stock has fallen 20% over the last three years with the greatest declines coming in 2024. Prior to that APA had been running well ahead of the index.
The oil and gas leader is positioned for a rebound during the incoming Trump administration. With policies promising exploration and drilling in the U.S. and Gulf of Mexico, APA has a firm foundation of growth.
Last year it acquired Callon Petroleum for $4.5 billion to gain access to its near-120,000 acres in the oil-rich Permian Basin. It complements APA’s own acreage in the Permian’s Midland Basin. APA’s product will exceed 500,000 barrels of oil equivalent per day (boe/d). APA’s Apache subsidiary is one of the top 10 producers in the Permian over the past five years, but it is looking to sell up to $1 billion of non-core Permian assets.
In 2021, APA approved the repurchase of 40 million shares and authorized another 40 million shares be bought back the next year. The company still has 39.3 million shares remaining on the authorization.
Over the past year, APA stock is down 30% and trades at less than 7 times next year’s earnings estimates. The E&P play also trades at a fraction of its sales and goes for a bargain basement 10 times the free cash flow it produces.
Nygren nearly doubled his holdings in APA in the third quarter, buying almost 4 million shares. He now owns 8.19 million shares. The hedge fund operator has owned the oil and gas stock since 2013, making it one of his longest-held positions.
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