John Rogers (Trades, Portfolio), leader of Ariel Investments, disclosed earlier this week his firm upped its stakes in Core Laboratories NV (CLB, Financial) and Madison Square Garden Entertainment Corp. (MSGE, Financial).
The guru's Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Like the tortoise featured in the firm's logo, Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.
According to GuruFocus Real-Time Picks, a Premium feature, the firm increased is holding in Core Laboratories by 43.8% and its Madison Square Garden position by 25.07% on Nov. 30.
Core Laboratories
With an impact of 0.44% on the equity portfolio, Ariel invested in 1.4 million shares of Core Laboratories. During the quarter, the stock traded for an average price of $21.97 per share.
The firm now holds 4.6 million shares total, which represent 1.45% of the equity portfolio. GuruFocus estimates the firm has gained 3.24% on the investment since establishing it in the second quarter.
The Netherlands-based oilfield services company, which provides core reservoir analysis to the petroleum industry, has a $1.22 billion market cap; its shares were trading around $27.42 on Thursday with a forward price-earnings ratio of 35.21, a price-book ratio of 18.04 and a price-sales ratio of 2.3.
The GF Value Line shows the stock is modestly undervalued. The GuruFocus valuation rank of 8 out of 10 also aligns with this assessment.
In its third-quarter commentary, the Ariel Fund noted disruptions related to the Covid-19 pandemic have put some near-term pressure on Core Laboratories' margins.
"In response, CLB is executing on prudent enhancements to the existing cost reduction plan, which include limiting cash outflows to achieve its free cash flow targets and reducing debt levels. Looking ahead, we believe the headwinds this asset-light business is experiencing will soften and expect CLB to experience modest growth in reservoir description. We also think CLB will see increased activity in fracturing rock, which should increase output in well completions and fuel longer term growth of the production enhancement sector."
GuruFocus rated Core Laboratories' financial strength 3 out of 10. As a result of issuing approximately $31 million in new long-term debt over the past three years, the company has weak interest coverage. The Altman Z-Score of 1.95 also indicates the company is under some pressure. The return on invested capital is also being eclipsed by the weighted average cost of capital, indicating struggles with creating value.
The company's profitability fared better, scoring a 7 out of 10 rating even though the operating margin is in decline and its returns are negative and underperform a majority of competitors. Core Laboratories also has a low Piotroski F-Score of 3, which implies business conditions are in poor shape. As a result of revenue per share declining over the past five years, the company's predictability rank of one out of five stars is on watch. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Core Laboratories, Rogers' firm has the largest stake with 10.28% of outstanding shares. Ken Fisher (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) also own the stock.
Madison Square Garden Entertainment
Impacting the equity portfolio by 0.44%, the firm picked up 400,579 shares of Madison Square Garden Entertainment. Shares traded for an average price of $76.01 each during the quarter.
Ariel now holds 1.9 million shares total, accounting for 2.2% of the equity portfolio. GuruFocus data shows the firm has gained approximately 5.62% on the investment so far.
The company headquartered in New York, which owns a number of well-known entertainment venues, has a market cap of $1.93 billion; its shares were trading around $79.99 on Thursday with a price-book ratio of 0.7 and a price-sales chart of 3.2.
According to the price chart, the stock is overvalued since it is trading above both its median price-book ratio and its median price-sales value.
In its third-quarter commentary, Rogers' firm noted the company was deeply impacted by the coronavirus pandemic since its performance venues, dining and nightlife locations were closed. It also cancelled its long-running Christmas show that features the Radio City Rockettes. Regardless, the firm says Madison Square Garden Entertainment "has ample liquidity to withstand the challenging operating environment until event attendance normalizes."
Madison Square Garden's financial strength was rated 6 out of 10 by GuruFocus on the back of a stable cash-to-debt ratio of 3.86. The Altman Z-Score of 1.83, however, indicates it is under some pressure since revenue per share has declined over the past 12 months.
Weighed down by negative margins and returns that underperform industry peers, the company's profitability scored a 1 out of 10 rating.
With a 8.28% stake, Rogers' firm is Madison Square Garden's largest guru shareholder. Mario Gabelli (Trades, Portfolio), Ron Baron (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Howard Marks (Trades, Portfolio), Michael Price (Trades, Portfolio), Prem Watsa (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) also have positions in the stock.
Portfolio composition and performance
The Ariel Fund's $6.89 billion equity portfolio, which was composed of 142 stocks as of the end of the third quarter, is largely invested in the financial services (20.01%), communication services (16.64%) and industrials (14.22%) sectors.
The fund's five largest holdings as of Sept. 30 were Baidu Inc. (BIDU, Financial), Philip Morris International Inc. (PM, Financial), Microsoft Corp. (MSFT, Financial), Mattel Inc. (MAT, Financial) and Stericycle Inc. (SRCL, Financial).
In its third-quarter commentary, the firm revealed the Ariel Fund returned 4.56% during the quarter. The fund posted a return of 24.67% in 2019, underperforming the S&P 500's 31.49% return.
Disclosure: No positions.
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