Bill Nygren, the long-time portfolio manager of the Oakmark Fund (MUTF:OAKMX), recently appeared on Morningstar’s The Long View podcast to discuss the markets. Having managed the $8 billion large-cap fund since 2000, the veteran investor’s hot stock picks are always in demand by investors.
In Nygren’s episode, he discusses financial stocks, pointing out that although the Oakmark Fund had 37% of its net assets in financial stocks, only about 40% is in banks. As a result, its weighting for banks overall is just 15%. That’s more than manageable.
Nygren believes financials are cheap right now.
“[If] you look over 30 or 50 years, they [financial services] tend to sell on average at maybe 80%, maybe as much as 90% of the S&P multiple, but rarely do they get above that, with the exception of some of the really high-quality companies that are called financial services today, like MasterCard, Visa, Moody’s,” Nygren said.
Oakmark’s having a good year, up nearly 19% year-to-date, 238 basis points higher than the S&P 500.
With Nygren’s fund on a roll, here are three hot stock picks from the portfolio manager’s 59 holdings. At least one will be from the financial sector.
Capital One Financial (COF)
Capital One Financial (NYSE:COF) is first on the list of Nygren’s stock picks, and was the Oakmark Fund’s second-largest position as of July 31, with a 3.2% weighting.
Nygren likes Capital One for several reasons.
First, it doesn’t have long-duration mortgage risk because most of its assets are in credit cards and auto loans. Secondly, it could securitize its entire auto loan portfolio and still make money on the transaction. Third, its deposit base is far less likely to pull a Silicon Valley Bank move and bolt simultaneously. That makes its deposit base very sticky.
Warren Buffett also likes Capital One. Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) purchased 2.55 million shares of the bank holding company in the second quarter. Berkshire now owns 12.5 million COF shares, or 3.3% of the bank.
Higher interest rates mean it’s collecting more on car loans, etc. While delinquencies will tick up, they’ll likely be offset by the higher interest earned on those loans.
In March, I selected Capital One and two other bank stocks doing big things with artificial intelligence (AI). For example, it created Slingshot to help customers manage their Snowflake (NYSE:SNOW) data.
Is it a coincidence that Berkshire owns both Capital One and Snowflake? I don’t think so.
CBRE Group (CBRE)
CBRE Group (NYSE:CBRE) was the Oakmark Fund’s 13th-largest position as of July 31 with a 2.1% weighting.
As most investors realize, AI is one of the hottest topics. On Aug. 21, CBRE announced that its Smart Facilities (FM) Solutions, which are powered by AI and advanced data analytics, just went over the one billion mark. That’s one billion square feet of commercial workspace at more than 20,000 sites using FM to run their offices more efficiently.
Nygren highlights in his Morningstar podcast that the old CBRE was very transaction-driven. Thus, earnings fell when transactions were down due to the cyclical nature of its business. Now, it’s generating far more recurring revenue that, while maybe not glamorous, keeps the coffers full no matter the economic environment.
“Today, the services part of their business, such as janitorial services for tenants in their buildings, those aren’t cyclical really at all, and those are becoming the more dominant part of the business value,” Nygren said.
For example, CBRE generated $7.72 billion in revenue in the second quarter. The most significant chunk (48%) was from facilities management provided by its Global Workplace Solutions (GWS) operating segment. Nothing else comes close.
Overall, its GWS business accounts for 70% of CBRE’s overall revenue – project management accounts for GWS’ other $1.74 billion in revenue – and 37% of its $306.5 million in core operating income.
In the second quarter, GWS’ operating income increased by 13%, while its more traditional Advisory Services fell by 46% over Q2 2022.
If you own CBRE stock, be thankful GWS exists. With it, quarters like this past one would make life much easier. Expect Advisory Services to bounce back in 2024.
KKR & Co. (KKR)
Last on the list of hot stock picks is KKR & Co. (NYSE:KKR) was the Oakmark Fund’s 4th-largest position as of July 31 with a 2.8% weighting.
I’ve been fascinated by KKR ever since I read Barbarians at the Gate, the story of how the investment firm managed to capture RJR Nabisco in a 1988 leveraged buyout (LBO). I heartily recommend it.
Today, of course, KKR is far more than an LBO specialist, with $519 billion in assets under management as of June 30. Of those assets, $420 billion generates healthy fees from its investors, etc.
Like most alternative asset managers, KKR constantly raises capital for its various funds in private equity, real estate, credit, infrastructure, and more. In the second quarter, it raised $13 billion in new capital, bringing its new capital raised in the latest 12 months to $54 billion.
Nygren likes KKR rather than other private equity shops because it invests in its own products – the funds I mentioned above.
“So, when you look at the balance sheet, there’s a very large line called ‘investments.’ Most of the other private equity firms were paying out almost all of their income, so they did not have that big ‘investments’ line,” Nygren said in the podcast.
At the end of the second quarter, the investments’ line of KKR’s balance sheet was $231.5 billion, up 7% from $216.6 billion at the end of 2022. That’s 80% of its $287.7 billion in total assets.
For example, its investments in private equity at the end of June were $29.9 billion. At the end of the second quarter, its private equity assets under management were $171.5 billion, so its investment in private equity accounts for 17% of its total assets under management.
That’s a big deal.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
