Joel Greenblatt (Trades, Portfolio), the Managing Principal and Co-Chief Investment Officer of Gotham Asset Management and inventor of the “Magic Formula” investing strategy, recently disclosed the firm’s portfolio updates for the fourth quarter of 2022, which ended on Dec. 31.
Gotham Asset Management offers a range of both long-only and long-short funds, all of which are based on valuation. The group holds that stock prices can be volatile and emotion-based in the short term, but that they will generally trade closer to their fair value after a period averaging around two to three years. The funds are centered on U.S. large and mid-cap companies that are trading at the biggest discount to the managers’ assessment of their value, based on factors such as return on capital, earnings yield and risk.
In its latest 13F filing, the firm revealed that its top buys for the quarter were Humana Inc. (HUM, Financial) and Lam Research Corp. (LRCX, Financial), while its biggest sells were Micron Technology Inc. (MU, Financial) and Adobe Inc. (ADBE, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Humana Inc.
Greenblatt’s firm upped its stake in Humana Inc. (HUM, Financial) by 701.51% to 28,173 shares. The trade had a 0.36% impact on the equity portfolio at the quarter’s average share price of $525.59.
Humana is the third-largest for-profit health insurance company in the U.S. The Louisville, Kentucky-based company’s offerings include Medicare Advantage (the private version of Medicare reimbursed by the government), employer group insurance, dental and vision plans.
As a major health insurer, especially one with a focus on Medicare, Humana’s growth has been steady and reliable throughout its history, and Morningstar (MORN) analysts are predicting more of the same due to the aging population in the U.S., projecting three-to-five-year revenue and earnings growth rates of 10.07% and 12.97%. In the 2023 enrollment period, Humana accounted for 23% of all new enrollment in Medicare Advantage plans according to CMS data, lagging only UnitedHealth Group (UNH, Financial).
Lam Research Corp
The firm also increased its Lam Research Corp. (LRCX, Financial) holding by 208.64% for a total of 37,059 shares, adding 0.30% to the equity portfolio. Shares traded for an average price of $418.30 during the quarter.
Lam Research is a semiconductor company based in Fremont, California. It primarily engages in designing, manufacturing, marketing and servicing semiconductor processing equipment that is used in the fabrication of advanced integrated circuits.
As a pick-and-shovel play for the semiconductor industry, Lam Research’s profits are tied more to industry growth rather than industry profitability. With its focus on advanced semiconductor equipment, Lam Research looks to be in a good position as demand for advanced chips remains strong even as the broader industry slows down. Headwinds such as the decline in PC demand and the U.S. banning the sale of advanced semiconductor equipment to China have dented Lam’s share price, bringing it to modestly undervalued territory based on the GF Value chart.
Micron Technology Inc.
The firm slashed its Micron Technology Inc. (MU, Financial) investment by 83.79% for a remaining stake of 41,663, slimming the equity portfolio by 0.33%. During the quarter, shares averaged $54.72 apiece.
Headquartered in Boise, Idaho, Micron is a semiconductor company that produces a variety of computer memory and data storage products. It markets its consumer products under the brand names Crucial and Ballistix.
Unlike Lam, Micron focuses on the parts of the semiconductor market that are currently in a steep downturn, especially the memory market. After missing earnings expectations, the company plans to cut costs to stabilize its profitability. The return on invested capital (ROIC) has once again fallen below the weighted average cost of capital (WACC), indicating value destruction.
Adobe Inc.
Gotham cut its stake in Adobe Inc. (ADBE, Financial) by 49.83% for a remaining holding worth 35,177 shares. The trade shaved 0.29% off the equity portfolio at the quarter’s average share price of $319.83.
Adobe is a San Jose, California-based computer software company that offers a suite of creative design-focused software products for photo editing, vector graphic illustration, website design, video editing, 3D modelling, social media, etc.
Adobe’s mostly uncontested market dominance and its software-as-a-service model have given it extremely high margins and predictable recurring revenues, which have historically translated to solid top and bottom line growth and high valuation multiples. In recent years, Figma has risen as a challenger on the collaborative design front, so Adobe struck a $20 billion deal to acquire Figma and maintain its stronghold on the creative market. Adobe’s stock fell in response to the deal due to the high price tag considering Figma only made $400 million in revenue in 2022.
See also
Greenblatt’s other notable trades during the quarter included additions to the S&P 500 ETF Trust (SPY, Financial) and PayPal Holdings Inc. (PYPL, Financial) and reductions to The Walt Disney Co (DIS, Financial) and Parker Hannifin Corp. (PH, Financial). The firm sold out of its position in FedEx Corp. (FDX, Financial).
As of the quarter’s end, the 13F equity portfolio included shares of 1,203 stocks valued at a total of $3.55 billion. The turnover for the period was 18%.
The top holding was the firm’s own ETF, the Gotham Enhanced 500 ETF (GSPY, Financial), with 7.07% of the equity portfolio, followed by the S&P 500 ETF Trust with 5.59% and the iShares Core S&P 500 ETF (IVV, Financial) with 1.80%. The top non-ETF holding was Snowflake Inc. (SNOW, Financial) with a 1.59% portfolio weight.
In terms of sector weighting, the firm was most invested in technology, health care and industrials.
