3 buys from Bill Nygren of Oakmark Funds

In the second quarter, the portfolio manager bought shares of these companies.

By GuruFocus.com Sep 7, 2012 12:40PM
 Stocks circled in newspaper, copyright Digital Vision, Getty ImagesBill Nygren is the portfolio manager at the Oakmark Funds. Oakmark has $6.1 billion in assets under management and has returned 12.29% to investors since its inception.

Nygren likes to buy stocks at a significant discount to their intrinsic values and is a big fan of share repurchases, as opposed to stocks with above-average yields, as those currently tend to be fully priced.

He also believes the largest businesses are often priced at a discount these days.

In the second quarter, Oakmark bought three new companies for its portfolio:
Devon Energy Corporation (DVN), American International Group (AIG) and Aon Plc (AON).

Devon Energy
Nygren purchased 1.4 million shares of Devon Energy at an average price of $63 in the second quarter of 2012. The holding accounts for 1.4% of his portfolio, and the stock price has declined 8% from the average price.

Devon Energy Corporation is an independent energy company engaged primarily in oil and gas exploration, development and production, and in the acquisition of producing properties. It has a market cap of $23.39 billion; its shares trade at around $58.29, with a price-to-earnings (P/E) ratio of 12.3 and price-to-sales (P/S) ratio of 2. The dividend yield of Devon Energy Corporation stocks is 1.4%.

In his second quarter letter, Nygren wrote about Devon: "The stock has been a poor performer, down from a high of $94 last year and an all-time high of $127 in 2008. With nearly 60% of its reserves in natural gas, Devon is widely perceived to be a gas company, and its stock price has traded down with natural gas prices. However, 80% of Devon's revenues and over 80% of our business value estimate stem from the company's oil and liquids business. Based on our estimates, the stock is now trading at just over half of its 2013 asset value. And we are not assuming any oil price recovery in our numbers."

American International Group
Nygren bought 2.1 million shares of AIG at an average price of $31 in the second quarter. The stock has gained 10% since.

World leaders in insurance and financial services, AIG has operations in more than 130 countries and jurisdictions, and a market cap of $61.59 billion. Its shares trade at around $34.43 with a P/E ratio of 17.8 and P/S ratio of 1.

Nygren also commented on AIG in his second quarter letter: "We believe AIG has made remarkable progress under the leadership of CEO Robert Benmosche. The government loans have been completely repaid, and the stock currently trades above the government's breakeven point of $29. . . . Capital is being invested primarily in share repurchase -- with AIG selling at just over half of book, this is nicely accretive to the company's per-share book value. We believe that AIG should earn over $3 per share this year and is on track to earn in excess of $5 per share within a few years."

AIG reported $2.3 billion in net income in the second quarter, compared to net income of $1.8 billion in the second quarter of 2011. Book value per common share increased 5% during the quarter to $60.58. The company also purchased $7.1 billion of Maiden Lane III Assets year-to-date.

Aon Plc
Nygren bought 1.3 million shares of Aon at an average price of $48. The stock has increased 9% from the average price since then.

Aon provides risk management services, insurance and reinsurance brokerage and human resource consulting and outsourcing. The company has a market cap of $16.96 billion; its shares trade at around $52.16 with a P/E ratio of 14.2 and P/S ratio of 1.5. Its dividend yield is 1.2%. Aon has had an annual average earnings growth of 6.5% over the past 10 years.

Nygren commented on Aon stock in his second quarter letter: "In 2012, after a restructuring that improved margins, AON is expected to earn over $4 per share after adding back goodwill amortization from recent acquisitions. Despite the growth in earnings and the potential for further margin improvement, the stock has been stagnant. As a result, the P/E ratio for AON has fallen from 25 times in 2007 to 11 times now, slightly less than the P/E ratio for the S&P 500. Unlike the insurance business, insurance brokerage is not capital intensive. Therefore, we believe AON has the ability to return most of its earnings to shareholders through share repurchases and dividends." 

In the second quarter, Aon repurchased 5.3 million of its shares for approximately $250 million, and authorized a $5 billion share repurchase program on April 19 to replace its old program, of which it has $4.7 billion of remaining authorization.

Nygren also sold out his small position in Cisco (CSCO), likely at a loss, and made a significant gain on a small holding of Tyco International (TYC). Other stocks he exited include EnCana (ECA), H&R Block (HRB) and Allstate Corp. (ALL).

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