By Philip van Doorn, MarketWatch
Hewlett Packard Enterprise
Hewlett Packard Enterprise Co. /zigman2/quotes/201998588/composite HPE +1.35% was created in October 2015 when the “old” Hewlett was split into this company and HP Inc. /zigman2/quotes/203461582/composite HPQ -2.31% . As you can see in the table below, which lists all of the stocks held in the portfolio as of Nov. 30, Burnstine’s position in HPE is far bigger than the one in HPQ.
Shares of Hewlett Packard Enterprise closed at $23.74 on Dec. 27, and Burnstine believes the stock “is worth $30” over the next 12 to 18 months.
“What [CEO] Meg Whitman has done is tremendous for the company,” he said, because she has “slowly been peeling it apart and unlocking value in the entity.” Following the spinoff of HP Inc., which retained the old HP’s PC and printer businesses, HP Enterprise agreed in May to spin off its enterprise business and merge it with Computer Sciences Corp. , and agreed in September to spin off its software business and merge it with Micro Focus International PLC.
Following the spin-offs, HP Enterprise will be left with its enterprise servers, storage equipment, networking equipment and technology services units.
“HPE is undervalued because there are still people who do not give Whitman credit for what has been done. When you look at it on a price-to-earnings or cash-flow basis, or enterprise-value-to-revenue, the stock is still trading cheaper to peers and cheaper than the market,” Burnstine said.
Take a look at this two-year chart for Wal-Mart Stores Inc.’s /zigman2/quotes/207374728/composite WMT -1.10% stock:
“At the beginning of 2015, Wal-Mart was a $90 stock and then it went to $60. It lost a third of its value. Those are big dollars,” Burnstine said.
What drew the fund manager to the stock was not only its decline, but management’s change of direction. “They are investing in their stores and investing in their people. They are also investing in their online initiatives,” which include the acquisition of Jet.com in September.
Burnstine says the timing of Wal-Mart’s $20 billion share-buyback program, announced in October 2015, was prescient. “I would not have liked it if they announced it at $90 a share, but since they announced it at $60, it’s awesome, because it shows management recognizes the value of the stock,” he said.
He emphasized that Wal-Mart was a three- to five-year play on the expected improvement in the appearance of the stores, as well as the greater investment in employees.
21st Century Fox
21st Century Fox Inc. /zigman2/quotes/207816609/composite FOXA -0.78% was formed in June 2013 when the “old” News Corp. was split into Fox and the “new” News Corp. /zigman2/quotes/201755982/composite NWSA -0.93% , which holds the formerly combined company’s publishing businesses, including Dow Jones, which includes the Wall Street Journal and MarketWatch.
Burnstine holds both companies in the portfolio, but Fox is its second-largest holding, at 4.7% of assets, while the News Corp. position is much smaller.
Burnstine said Fox was trading at a discounted valuation to other media companies, and that he was impressed by the buildup of its regional sports network, and its offer to acquire the 60% of Sky PLC that it doesn’t already own.
According to Burnstine, Discovery Communications Inc. /zigman2/quotes/201842100/composite DISCK +3.17% CEO David Zaslav’s strategy of focusing the company’s various content networks to specific audience demographics will pay off.
Such targeting helps Discovery’s networks stick out from the crowd for viewers who have over 100 stations to chose from, which can set up the company “to fight the next battle, including ‘over-the-top’ distribution,” which means distributing content directly to consumers, as Netflix /zigman2/quotes/202353025/composite NFLX -1.81% does.
Burnstine is attracted by Discovery’s forward price-to-earnings ratio of 11.9, based on the consensus 2017 earnings estimate. This compares with a forward P/E of 17.1 for the S&P 500.
Here are all 31 equity holdings of the Fairpointe Focused Equity Fund as of Nov. 30:
|Company||Ticker||Industry||Share of portfolio||Total return - 2016, through Dec. 23||Total return - 5 years|
|Kennametal Inc.||/zigman2/quotes/208770361/composite KMT||Industrial Machinery||4.7%||75%||-2%|
|21st Century Fox Inc. Class A||/zigman2/quotes/207816609/composite FOXA||Media Conglomerates||4.7%||6%||90%|
|Carnival Corp.||/zigman2/quotes/202325446/composite CCL||Cruiselines||4.3%||0%||85%|
|Hewlett Packard Enterprise Co.||/zigman2/quotes/201998588/composite HPE||Computer Processing Hardware||4.3%||58%||N/A|
|FMC Corp.||/zigman2/quotes/200631712/composite FMC||Agricultural Chemicals||4.3%||48%||38%|
|Teradata Corp.||/zigman2/quotes/200055247/composite TDC||Information Technology Services||4.3%||3%||-45%|
|Northern Trust Corp.||/zigman2/quotes/207066008/composite NTRS||Regional Banks||4.2%||27%||149%|
|Discovery Communications Inc. Class C||/zigman2/quotes/201842100/composite DISCK||Media Conglomerates||4.2%||9%||48%|
|Legg Mason Inc.||/zigman2/quotes/209531190/composite LM||Investment Managers||4.0%||-19%||40%|
|Wal-Mart Stores Inc.||/zigman2/quotes/207374728/composite WMT||Discount Stores||3.9%||17%||33%|
|Baker-Hughes Inc.||Oilfield Services/ Equipment||3.7%||44%||41%|
|BP PLC ADR||/zigman2/quotes/207305210/composite BP||Integrated Oil||3.7%||28%||14%|
|Cree Inc.||/zigman2/quotes/204547734/composite CREE||Electronic Components||3.6%||4%||27%|
|Liberty Interactive Corp. QVC Group Series A||Catalog/ Specialty Distribution||3.4%||-26%||63%|
|Quanta Services Inc.||/zigman2/quotes/203420082/composite PWR||Engineering and Construction||3.4%||73%||61%|
|Staples Inc.||Specialty Stores||3.4%||3%||-21%|
|Varian Medical Systems Inc.||/zigman2/quotes/203738795/composite VAR||Medical Specialties||3.3%||13%||37%|
|Scholastic Corp.||/zigman2/quotes/205063902/composite SCHL||Publishing||3.3%||26%||69%|
|HP Inc.||/zigman2/quotes/203461582/composite HPQ||Computer Processing Hardware||3.1%||33%||49%|
|Fluor Corp.||/zigman2/quotes/203795934/composite FLR||Engineering and Construction||2.9%||16%||13%|
|New Corp. Class A||/zigman2/quotes/201755982/composite NWSA||Publishing||2.7%||-9%||N/A|
|VMware Inc. Class A||/zigman2/quotes/209864107/composite VMW||Information Technology Services||2.7%||42%||-6%|
|Hologic Inc.||/zigman2/quotes/201671131/composite HOLX||Medical Specialties||2.5%||4%||129%|
|AGCO Corp.||/zigman2/quotes/203686311/composite AGCO||Trucks/ Construction/ Farm Machinery||2.3%||30%||42%|
|Transocean Ltd.||/zigman2/quotes/208905612/composite RIG||Contract Drilling||2.3%||23%||-53%|
|Cisco Systems Inc.||/zigman2/quotes/209509471/composite CSCO||Computer Communications||2.2%||17%||91%|
|Unilever PLC ADR||/zigman2/quotes/204685760/composite UL||Household/ Personal Care||2.0%||-3%||43%|
|PepsiCo Inc.||/zigman2/quotes/208744353/composite PEP||Beverages: Non-alcoholic||1.8%||8%||83%|
|Apache Corp.||/zigman2/quotes/200648444/composite APA||Oil and Gas Production||1.2%||52%||-22%|
|Greif Class A||/zigman2/quotes/203386038/composite GEF||Containers/ Packaging||1.1%||79%||41%|
|Lions Gate Entertainment Corp.||/zigman2/quotes/200343824/composite LGF.A||Movies/ Entertainment||0.5%||-19%||227%|
|Sources: Fairpointe Capital LLC, FactSet|