Jerome Dodson (Trades, Portfolio), the legendary founder of San Francisco-based Parnassus Investments, is known for his preference for socially responsible companies.
With the goal of capital appreciation, the firm’s Parnassus Mid Cap Growth Fund invests in mid-cap companies that are trading at a discount, have strong competitive advantages, relevant products or services that will compound growth over the long term and quality management teams. It also takes the environmental and social impacts of the business into account.
While Dodson stepped down from managing the funds in 2020, he remained chairman of the firm’s board. Then, in July of 2021, Affiliated Managers Group announced it was acquiring a majority stake in Parnassus Investments for $600 million. The deal closed in October of that year.
Heading into a new year, many investors are likely looking for value opportunities to take advantage of. As a result, they may be interested in some of the stocks in the fund’s $655 million equity portfolio that are undervalued according to an earnings-based discounted cash flow model.
GuruFocus portfolio data, which is based on NPORT-P filings as of Dec. 31, shows current positions in the fund’s equity portfolio that have a margin of safety and high predictability include Signature Bank (SBNY, Financial), Lam Research Corp. (LRCX, Financial), Pool Corp. (POOL, Financial), KLA Corp. (KLAC, Financial) and O’Reilly Automotive Inc. (ORLY, Financial).
Investors should be aware portfolio updates for mutual funds do not necessarily provide a complete picture of a guru’s holdings. The data is sourced from the quarterly updates on the website of the fund(s) in question. This usually consists of long equity positions in U.S. and foreign stocks. All numbers are as of the quarter’s end only; it is possible the guru may have already made changes to the positions after the quarter ended. However, even this limited data can provide valuable information.
Signature Bank
Shares of Signature Bank (SBNY, Financial) are trading at a 74.08% discount to their fair value of $471.59 according to the earnings-based DCF model.
The New York-based commercial bank has a $7.83 billion market cap; its shares were trading around $124.39 on Friday with a price-earnings ratio of 6.07, a price-book ratio of 1.02 and a price-sales ratio of 2.99.
The GF Value Line suggests the stock is significantly undervalued currently based on its historical ratios, past financial performance and analysts’ future earnings estimates.
Further, the GF Score of 80 out of 100 indicates the company is likely to have good performance going forward. While it received high growth and profitability ratings, the financial strength, GF Value and momentum ranks were more moderate.
The company also has a predictability rank of 4.5 out of five stars. According to GuruFocus research, companies with this rank return an average of 10.6% annually over a 10-year period.
With 74,090 shares, the stock represents 1.30% of the fund’s equity portfolio. GuruFocus estimates it has lost 3.74% on the investment since establishing it in the first quarter of 2021.
Of the gurus invested in Signature Bank, the Parnassus Value Equity Fund (Trades, Portfolio) has the largest holding with 0.93% of its outstanding shares. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, First Pacific Advisors (Trades, Portfolio), Steven Romick (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and several other gurus also have positions in the stock.
Lam Research
Lam Research’s (LRCX, Financial) stock is trading at a 61.66% discount to its DCF fair value of $1,199.87.
The manufacturer of semiconductor fabrication equipment, which is headquartered in Fremont, California, has a market cap of $63.26 billion; its shares were trading around $463.82 on Friday with a price-earnings ratio of 13.3, a price-book ratio of 8.53 and a price-sales ratio of 3.57.
According to the GF Value Line, the stock is significantly undervalued currently.
The GF Score of 99 indicates the company has high outperformance potential, driven by strong ratings across the board.
Lam Research also has a 4.5-star predictability rank.
Accounting for 2.19% of the equity portfolio, the fund holds 34,141 shares of Lam Research. GuruFocus found Parnassus has gained 37.24% on the investment, which is new to the portfolio, so far.
With a 1.76% stake, Frank Sands (Trades, Portfolio) is the company’s largest guru shareholder. Other gurus invested in Lam include Ken Fisher (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Simons’ firm, Lee Ainslie (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)’s Bridgewater Associates.
Pool
Generating a DCF fair value of $669.96, shares of Pool (POOL, Financial) are trading with a 48.28% margin of safety.
The Covington, Louisiana-based company, which is a wholesale distributor of swimming pool supplies, parts and outdoor living products, has a $13.66 billion market cap; its shares were trading around $349.93 on Friday with a price-earnings ratio of 17.97, a price-book ratio of 11.48 and a price-sales ratio of 2.26.
Based on the GF Value Line, the stock, while undervalued, appears to be a value trap. As such, potential investors should do thorough research before making a decision.
The company has high outperformance potential, however, based on its GF Score of 94. Although it raked in strong ratings for profitability, growth and GF Value, the financial strength and momentum ranks were more moderate.
Further, the company has a 4.5-star predictability rank.
Occupying 4.13% of the equity portfolio, the Mid Cap Growth Fund holds 89,405 shares of Pool. According to GuruFocus, it has gained approximately 38.13% on the investment, which is its third-largest holding, over its lifetime.
Fisher has the largest holding with 0.53% of Pool’s outstanding shares. Simons’ firm, Ron Baron (Trades, Portfolio), Chuck Royce (Trades, Portfolio), David Rolfe (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Jones, Caxton Associates (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio) also own the stock.
KLA
With a DCF fair value of $687.87, KLA (KLA) is trading with a 41.19% margin of safety.
The company headquartered in Milpitas, California, which makes yield management and process control systems for semiconductor manufacturers, has a market cap of $57.80 billion; its shares were trading around $407.87 on Friday with a price-earnings ratio of 18.42, a price-book ratio of 27.50 and a price-sales ratio of 6.14.
The GF Value Line suggests the stock is fairly valued currently.
The GF Score of 95 also indicates it has high outperformance potential on the back of strong ratings for profitability, growth and momentum and middling marks for financial strength and GF Value.
The company, however, has a two-star predictability rank. GuruFocus found companies with this rank return an average of 6% annually.
Reflecting 2.47% of the equity portfolio, the fund holds 42,973 shares of KLA. GuruFocus says it has gained an estimated 58.33% on the investment since the first quarter of 2020.
Of the gurus invested in KLA, PRIMECAP Management (Trades, Portfolio) has the largest stake with 5.02% of its outstanding shares. Grantham, Simons’ firm, Dalio’s firm, John Hussman (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) also have notable holdings.
O’Reilly Automotive
Yielding a 29.79% margin of safety, O’Reilly Automotive (ORLY, Financial) is trading below its DCF value of $1,127.26.
The Springfield, Missouri-based auto parts retailer has a $49.32 billion market cap; its shares were trading around $788.20 on Friday with a price-earnings ratio of 24.06 and a price-sales ratio of 3.73.
According to the GF Value Line, the stock is fairly valued currently.
With a GF Score of 89, the company has good outperformance potential. It received high ratings for two of the criteria, middling marks for momentum and financial strength and a low rank for GF Value.
Additionally, the company has a five-star predictability rank. GuruFocus data shows companies with this rank return, on average, 12.1% annually.
As the 10th-largest holding with a weight of 3.37%, Parnassus has 26,154 shares of O’Reilly. It has gained an estimated 84.78% on the investment.
With a 2.35% stake, Chuck Akre (Trades, Portfolio)’s Akre Capital is O’Reilly’s largest guru shareholder. Other top guru investors include the late Spiros Segalas’ Harbor Capital Appreciation Fund (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Simons’ firm, PRIMECAP Management (Trades, Portfolio), Dalio’s firm and Ainslie.
Additional options
Other stocks in Parnassus’ equity portfolio that were undervalued on a DCF basis were Old Dominion Freight Line Inc. (ODFL, Financial) and C.H. Robinson Worldwide Inc. (CHRW, Financial).
