December 23, 2020
Michael NicolasÂ has been a co-manager of the Oakmark Fund since 2020. He is also an investment analyst at Harris Associates and a VP of the Oakmark Funds. He started at Harris Associates in 2013 after serving as a managing director at Lakeview Investment Group. Prior to that, he was a senior analyst at Stratford Advisory Group.
In this extensive 4,036 word interview, Mr. Nicolas discusses the Oakmark Funds investing process and philosophy and illustrates with many detailed top stock picks.
â€œAt Oakmark, we adhere to a proven, bottom-up investment process. We look to identify individual companies trading for meaningful discounts to our estimate of intrinsic value, and where we expect per-share value to grow over time.
Furthermore, we want to make sure that the management teams that run our companies are properly aligned with us, and that they think and act like owners of the business.
We spend an awful lot of time studying the track records and the capital allocation history of the management teams weâ€™re considering investing with, which is critically important given our willingness and ability to own a company for a long time.
In terms of my own evolution relative to earlier in my career, Iâ€™ve gained a much greater appreciation for how important management quality can be in affecting investment outcomes.â€
This leads to an idiosyncratic value based portfolio:
â€œâ€¦the way we define value is different than many of our peers. We donâ€™t require a current or prospective portfolio company to trade for a low multiple of the earnings or book value they publish in their audited financial statements.
Our CIOâ€“U.S. Equities, Bill Nygren, has written at length about the flaws of solely relying on generally accepted accounting principles â€” or GAAP â€” to determine how profitable or valuable a company is.
At Oakmark, we often go to painstaking lengths to recast a companyâ€™s financial statements in order to reflect what we believe its true economic earnings power to be, which can sometimes look quite different than how GAAP would define it.
For these reasons, youâ€™ll see a mix of what I would call traditional value names in our portfolio, like many of our financial holdings, and non-traditional value names, like Alphabet (NASDAQ:GOOG)â€¦â€
Some recent picks also highlight the Oakmark Funds investment philosophy:
Â â€œThe two most recent positions that weâ€™ve added to the portfolio wereÂ CBREÂ GroupÂ (NYSE:CBRE) andÂ Keurig Dr PepperÂ (NASDAQ:KDP).
CBREÂ is the largest commercial real estate services firm in the U.S. The company has significant scale across its various service lines and geographies, which enables it to consistently invest more than smaller peers into the research, tools and technology that customers value.
This industry-leading value proposition has driven consistent share gains forÂ CBREÂ in recent years, as large clients have been attracted to the companyâ€™s differentiated capabilities and the best brokers have been attracted by the steady stream of clients.
We expectÂ CBREÂ to continue to gain market share in the highly fragmented brokerage industry for many years to come while it further transitions away from transaction-driven commissions and toward more contractual fee revenues.
Thereâ€™ve been some outsized fears around â€œwork from homeâ€ that have caused the company to sell for less than 13 times our estimate of mid-cycle earnings. We think this is an attractive price for a high-quality and well-managed business likeÂ CBRE.
The other name that we recently acquired wasÂ Keurig Dr Pepper.Â Keurig Dr PepperÂ is one of North Americaâ€™s leading beverage companies and commands a strong market position in single-serve coffee and flavored sodas.
Keurigâ€™sÂ competitive advantages are many. It has a low-cost production footprint, the largest installed base of brewers and exclusive brand partnerships, which allow it to collect a toll on most pods sold in America today.
We believeÂ Keurigâ€™s brands should deliver steady growth, consistent market share gains and significant excess cash flow. Itâ€™s an above-average business trading at a meaningful discount to the market, its beverage peers and historical private market transactions.â€