In this article, we will discuss the 10 best value stocks to buy now according to Howard Marks. You can skip our detailed analysis of Marks' hedge fund's performance and his latest portfolio updates to read 5 Best Value Stocks To Buy Now According To Howard Marks.
Billionaire value investor Howard Marks is the co-founder of Oaktree Capital Management. In a recent TV interview, he suggested investors to invest in companies that were hit harder by the pandemic as he believes they will eventually recover and start gaining value. He is bullish on the US economy and value opportunities. He, however, is bearish on bonds because of low yield. He says a portfolio mix of 60% stocks and 40% bonds doesn’t work in the current environment, suggesting investors find alternative assets that offer bigger returns with low risk. The co-founder of the $99 billion hedge fund also favors growth stocks.
"The fear is of an overheated economy that produces inflation and thus, calls for higher interest rates. I think that the great tech stocks, the great growth stocks, can offset inflation through their growth, but you have to pick the right ones."
Billionaire Howard Marks was born in New York and began his career at Citibank. Later, he joined TCW Group in 1985 as an asset manager. In 1995, he co-founded Oaktree Capital Management with the strategy of investing in private equity, high-yield debt, and distressed debt. His hedge fund has raised $10 billion during the financial crisis to buy distressed assets, which paid off well for Oaktree investors. He is a distressed debt investor and always believes in chasing investment opportunities that others are ignoring.
“For your performance to diverge from the norm, your expectations — and thus your portfolio — have to diverge from the norm, and you have to be more right than the consensus. Different and better: that’s a pretty good description of second-level thinking. Those who consider the investment process simple generally aren’t aware of the need for — or even the existence of — second-level thinking. Thus, many people are misled into believing that everyone can be a successful investor. Not everyone can. But the good news is that the prevalence of first-level thinkers increases the returns available to second-level thinkers. To consistently achieve superior investment returns, you must be one of them,” Mark said in his book “The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor”.
Marks' hedge fund went public in 2012 through initial public offerings. In 2019, Oaktree sold 61% of its stake to Brookfield Asset Management for $4.9 billion in cash and stock. Despite that, Oaktree is operating independently and Marks is leading all the activities. The famed value investor invests in stocks that offer substantial value-generating opportunities. At the end of the latest quarter, Oaktree’s 13F portfolio market value came in at $5.8 billion while total assets under management were around $99 billion.
OakTree held a stake in 178 stocks at the end of the fourth quarter, and the top ten stock position weighted around 58% of the overall portfolio. Financial stocks accounted for 21% of the 13F portfolio at the end of Q4. Moreover, transportation, energy, and information technology were among his most favorite areas of investments.
While Howard Marks' reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Howard Marks of Oaktree Capital Management
Let’s start examining the 10 best value stocks to buy now according to Howard Marks.
10. América Móvil, S.A.B. de C.V. (NYSE: AMX)
The famed value investor initiated a position in América Móvil S.A.B. de C.V. (NYSE: AMX) during the September quarter of 2020 and added to his stake in the fourth quarter. AMX's position is valued at $40 million and represented 0.66% of Oaktree Capital’s 13F portfolio. Shares of América Móvil rallied almost 10% since Howard Marks initiated a position. In addition to the share price gains, the Los Angles-based firm will also collect dividends from AMX. The company offers a dividend yield of 2.67% at present.
America Movil has seen an increase in hedge fund interest lately. America Movil was in 16 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all-time high for this statistic is 17. There were 11 hedge funds in our database with AMX holdings at the end of June.
9. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM)
Oaktree Capital has generated big gains from its long-running investment in Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM). The firm first initiated a position in the chipmaker in 2012. However, Oaktree slashed its position by 84% during the fourth quarter to capitalize on share price gains. Shares of the chipmaker surged close to 900% in the last ten years. Moreover, Oaktree also enjoyed dividends from Taiwan Semiconductor. The company paid dividends consistently since 2004. Its dividend growth rate averages around 14% in the last ten years.
Despite the big stake sale in Q4, Oaktree’s held 398,949 shares of Taiwan Semiconductor at the end of Q4. The stock is among the 10 best value stocks to buy now according to Howard Marks.
Bonsai Partners, which returned 247% for the fourth quarter, highlighted TSM’s performance in the investor letter. Here is what Bonsai Partners stated in the Q4 letter:
“Taiwan Semiconductor is the world’s largest outsourced foundry of logic semiconductor chips. TSMC’s shares appreciated 34.5% during the quarter. Taiwan Semiconductor continues to see unprecedented demand, albeit at a slightly less rapid growth rate than earlier in 2020. At the time of writing, TSMC announced strong fourth-quarter results and staggering growth in their expected capital expenditures for 2021 – growing from $17B in 2020 to $25B to $28B in 2021. Forward-looking capital expenditures are the key leading indicator of their medium-term growth rate expectations, and I expect TSMC management will continue to earn excellent returns on these colossal investments.
TSMC’s capital expenditure growth is likely due to investment in their new U.S. manufacturing footprint, rapid investment in their cutting edge process technology, as well as generally high levels of customer demand. Lately, we’ve seen semiconductor shortages in some of their less advanced process technologies, emphasizing the current state of the semiconductor supply-demand imbalance.”
8. Mr. Cooper Group Inc. (NASDAQ: COOP)
The financial services company Mr. Cooper Group Inc. (NASDAQ: COOP) is ranked eighth in the list of 10 best value stocks to buy now according to Howard Marks. The value investor sold out 13% of his COOP stock position in Q4 to capitalize on a stunning share price rally in 2020. Mr. Cooper Group's share price rallied more than 500% in 2020. Despite the recent sale, Oaktree held 1.5 million shares of Mr. Cooper Group at the end of Q4.
Voss Capital, an investment management firm, stated in the fourth quarter investor letter that Cooper Group still has 35% upside potential. Here is what Voss Capital stated:
"Our thesis for Mr. Cooper is two-fold. Firstly, we believe the stock has been “held back” because it is perceived to be a temporary, but unsustainable, beneficiary of the spike in refinancing. Not only do we believe refinancing can continue into 2021 (refi mortgage apps up 45.6% y/y for the week ended February 5th), which will increase book value, but we also believe their mortgage servicing business will pick up when refinancing and originations ebb, smoothing the earnings far more than is currently priced in.
Secondly, management has telegraphed their intent to sell Xome, either part or in whole, and have been adamant the business is worth “at least $1 billion”, a number that seems both plausible and potentially conservative in the current market environment with frothy FinTech/marketplace valuations. While Xome’s results are present on the income statement, its value is nowhere to be found on the balance sheet. With a sale in the $1 billion range Mr. Cooper will be swimming in cash like Scrooge McDuck.14 The sale will also materially increase tangible book value per share, which is how most investors value the stock. Because of tax accounting around their Net Operating Losses(NOLs), the company will have more flexibility around buybacks and special dividends starting in August. So, our thesis is that a sale of Xome will occur and the market will either push the company to at least tangible book value, or management will force the issue by aggressively buying back stock and/or issuing a large special dividend. We think the stock has >35% upside over the next six months.”
7. AngloGold Ashanti Limited (NYSE: AU)
Howard Marks strongly believes in the future fundamentals of AngloGold Ashanti Limited (NYSE: AU). His hedge fund had raised the position in gold mining company by 8% to 3.1 million shares in the fourth quarter. The firm first initiated a position in AU in 2013. The share price of AngloGold grew 28% in the last twelve months, extending the five-year gain to around 60%. AU offers a dividend yield in the range of 2%.
AngloGold Ashanti Limited was in 17 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all-time high for this statistic is 27. There were 16 hedge funds in our database with AU positions at the end of the second quarter.
6. Petróleo Brasileiro S.A. – Petrobras (NYSE: PBR)
The Brazilian oil and gas company Petróleo Brasileiro S.A. – Petrobras (NYSE: PBR) is ranked sixth in the list of 10 best value stocks to buy now according to Howard Marks. Oaktree increased its position in the Brazilian company by 55% to 6.1 million shares in Q4. PBR stock price underperformed this year following a strong surge in the second half of 2020.
The number of long hedge fund positions in PBR fell from 31 in the September quarter to 24 at the end of Q4 2020. The all-time high for this statistic is 35.
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Disclosure: None. 10 Best Value Stocks To Buy Now According To Howard Marks is originally published on Insider Monkey.