In the ever-changing landscape of financial markets, the search for stability and resilience remains a paramount concern, especially in the face of potential economic downturns. Ray Dalio (Trades, Portfolio), the visionary founder of Bridgewater Associates, is well-known for his strategic prowess in navigating market fluctuations.
Bridgewater understands the key to weathering storms lies in a well-constructed portfolio that includes high-quality, defensive stocks. These stocks, carefully chosen for their ability to thrive even in challenging times, stand as pillars of stability and potential growth amidst uncertainty.
Despite the different investment strategies, Bridgewater maintains long-term positions in certain high-quality and defensive stocks, not only worth a second look but also a potential stronghold in the face of an upcoming recession. They also make up the firm's largest holdings.
Procter & Gamble
Procter & Gamble Co. (PG, Financial) constitutes 4.33% of the firm's equity portfolio. Acquired at an average price of $141.41, the stock's 7.4% price return highlights its performance. However, a second-quarter transaction saw a reduction of 328,590 shares, equating to a 6.65% decrease.
The remaining 4.62 million shares contribute to a current portfolio value of $701 million. Its forward non-GAAP price-earnings ratio of 23.73 surpasses the sector median of 18.32, indicating a relative overvaluation. Additionally, the forward enterprise value-to-sales ratio stands at 4.51 compared to the sector median of 1.69. Absolute valuation based on the forward non-GAAP price-earnings ratio and EV-to-sales ratio signifies fair valuation.
As such, the reduction is justified based on the higher forward ratios, potentially indicating a favorable opportunity for adjustment at relative overvaluation.
Johnson & Johnson
Johnson & Johnson (JNJ, Financial) makes up 3.25% of Bridgewater's portfolio with an average buy price of $161.26, generating a modest return of 2.9%. In the second quarter, the firm reduced the holding by 406,023 shares, signifying a quarter-over-quarter change of -11.32%. The total share count is now 3.18 million, amounting to a current holding value of $528 million.
Examining valuation metrics, the forward non-GAAP price-earnings ratio stands at 15.44, contrasting with the sector median of 19.83, implying a relative undervaluation. Over the past five years, the historical average ratio settled at 16.80, indicating an absolute undervaluation.
The forward EV-to-sales ratio is 4.49, surpassing the sector median of 3.47 and translating to relative overvaluation. However, based on a five-year historical average, the ratio is 4.70, revealing an absolute undervaluation.
However, relative undervaluation based on both ratios suggests a potential buying opportunity; therefore, selling shares is fair in line with absolute valuation.
Coca-Cola
Coca-Cola Co. (KO, Financial) accounts for 3.06% of the portfolio with an average buy price of $54.62, resulting in a return of roughly 10%. During the second quarter, the firm upped the holding by 69,667 shares, reflecting a quarter-over-quarter change of 0.86%. The total share count is 8.21 million, valued at $493 million.
The forward non-GAAP price-earnings ratio stands at 22.75, compared to the sector median of 18.32, indicating a relative overvaluation. Over the past five years, the average ratio was 24.57, showing an absolute undervaluation.
The forward EV-to-sales ratio of 6.41 is considerably higher than the sector median of 1.69, suggesting a relative overvaluation. The five-year historical average for this ratio was 7.09, yielding an absolute undervaluation.
However, adding more shares during the quarter signifies capturing a quality stock at a fair value based on absolute measures.
PepsiCo
PepsiCo represents 2.94% of the equity portfolio with an average purchase price of $151.41, delivering a favorable return of around 16%. The firm reduced the holding by 240,957 shares, equating to an 8.6% decrease for the second quarter. The current share count is 2.57 million, valuing the position at approximately $451 million.
The non-GAAP forward price-earnings ratio is 23.50, surpassing the sector median of 18.32. Over the past five years, the historical average ratio was 24.26, reflecting a minor absolute undervaluation.
The forward EV-to-sales ratio is 3.02, notably higher than the sector median of 1.69. Comparatively, the five-year historical average for this ratio was 3.17, indicating a slight absolute undervaluation.
The reduction signifies a systematic exit from considering fair valuation on an absolute basis and high relative overvaluation. It also suggests the preference for Coca-Cola over PepsiCo based on quality filters despite the higher price return.
Costco
Costco Wholesale Corp. (COST, Financial) occupies 2.69% of the equity portfolio with an average buy price of $410.18, yielding a positive return of 31.3%. During the second quarter, the investment was reduced by 53,567 shares, or 6.22%. The total share count is 807,709, which is valued at $435 million.
The non-GAAP forward price-earnings ratio is 36.94, significantly above the sector median of 18.32. Over the past five years, the historical average ratio was comparatively close at 35.74, but overall shows absolute overvaluation.
The forward EV-to-sales ratio is 0.97, notably lower than the sector median of 1.69. The five-year historical average stands at 0.87. This is indicative of absolute overvaluation.
The reduction of the position signifies a covering of profits due to overvaluation on an absolute basis and high relative overvaluation.
Walmart
Retail giant Walmart Inc. (WMT, Financial) holds 2.49% of the equity portfolio with an average price of $139.90. The stock has yielded a favorable return of 12.2%. Bridgewater cut back the holding by 107,168 shares, reflecting a 4% decrease. The total share count is 2.56 million, valuing the holding at approximately $402 million.
The forward non-GAAP price-earnings ratio is 24.29, surpassing the sector median of 18.32. Over the past five years, the average forward ratio was 23.20, highlighting a mild absolute overvaluation.
Walmart has an attractive EV-to-sales ratio of 0.75, while the sector median is notably higher at 1.69. This showcases a relative undervaluation. Analyzing its five-year historical average, the ratio aligns closely at 0.76, resulting in a minor absolute undervaluation.
Here, a minor reduction is justified considering overvaluation based on price-earnings and a fair absolute valuation based on EV-to-sales.
McDonald’s
McDonald's Corp. (MCD, Financial) makes up 2.62% of the equity portfolio with an average buy price of $231.35, yielding a positive return of 21.2%. The position was reduced during the quarter by 119,385 shares, reflecting a 7.8% decrease. The total share count is 1.42 million, valued at $398 million.
The non-GAAP forward price-earnings ratio of 24.20 surpasses the sector median of 14.73, indicating a relative overvaluation. The five-year historical average ratio is 26.82, showing an absolute undervaluation.
The company's forward EV-to-sales ratio is 9.88, significantly higher than the sector median of 1.16, implying a massive relative overvaluation. The five-year historical average ratio is 9.68, resulting in a slight absolute overvaluation.
Therefore, the reduction in the McDonald’s investment aligns with Dalio’s strategy of systematically covering relative overvaluation.
Takeaway
The world of finance may be intricate, evolving and, at times, capricious, but Dalio's legacy reminds us that in the art of investing, quality endures. These stocks are not just a shelter from the storm; they are the vanguards of progress, the guardians of stability and the embodiment of the resilience that defines not only Dalio's strategy, but also the spirit of those who believe that even in the most tumultuous times, the pursuit of excellence remains unwavering.
