SECOND QUARTER, 2024
- The Fund returned -6.19% versus 4.28% for the S&P 500 Index for the quarter, and 11.56% since inception, versus 9.69% for the S&P 500 Index over the same period.
- At the sector level, the largest contributor was communication services, and the largest detractors were industrials and health care.
- While the outperformance of growth stocks weighed on our relative returns in the second quarter, it has also created opportunities to purchase shares in a diversified set of undervalued securities. Over the long term, we believe such value investments will generate strong returns for our clients. Read more in the 2Q 2024 U.S. equity market commentary.
TOP CONTRIBUTOR | DETRACTOR
Top contributor
Alphabet (GOOG, Financial) was the top contributor during the quarter. The stock price rose after the U.S.-based communication services company reported first-quarter operating income growth of 31% versus the prior year. We believe management's cost reduction initiatives will improve operating efficiency and lead to faster earnings growth. In addition, we expect the company's new AI-powered features, showcased at the recent Google I/O conference, will increase the value of its products to users. At its current share price, we continue to see upside to our estimate of Alphabet's intrinsic value.
Top detractor
Paycom Software (PAYC, Financial) was the top detractor during the quarter. The U.S.-based payroll software company's stock underperformed following the release of mixed first quarter results and the resignation of Co-CEO Chris Thomas. We believe Paycom's softer than expected results are largely attributable to a weak macro environment for payroll software and that Paycom is taking the right steps to improve operational performance, which should enable a return to healthy revenue growth when the market improves. And although the Co-CEO's resignation was a negative surprise, we spoke with founder and CEO Chad Richison following the announcement and, following the conversation, remain confident in the company's long-term prospects. At the current price, Paycom trades for 4x revenue which we believe is too cheap for highly profitable, growing software business.
PORTFOLIO ACTIVITY
New purchases
Centene (CNC, Financial) is one of the largest health insurers in the U.S. The company specializes in three major government-sponsored programs: Medicaid, Marketplace and Medicare Advantage, each of which benefits from long-term secular tailwinds. In Medicaid, states are steadily outsourcing their programs to companies like Centene to reduce costs and improve care quality. Managed Medicaid penetration has increased throughout the past decade and we expect further gains over time. In Marketplace, growth is driven by the trend toward more individuals buying health insurance. Centene holds the #1 market share in both of these programs and is well positioned to capitalize on their continued growth. Finally, we believe management is successfully turning around Centene's Medicare business and expect the division to generate positive earnings over time. After adjusting for losses stemming from Centene's Medicare business, we were able to purchase shares at a single-digit P/E multiple, which we think is too cheap for a leading, secularly growing Medicaid company and an improving Medicare business.
PORTFOLIO MANAGERS
(Year joined Harris | Oakmark)
William C. Nygren, CFA (1983)
Robert F. Bierig (2012)
Alex Fitch, CFA (2010)
Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. Total return includes change in share prices and, in each case, includes reinvestment of dividends and capital gain distributions. The investment return and principal value vary so that an investor's shares, when redeemed, may be worth more or less than the original cost.
The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) are for informational purposes only and rep-resent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions without notice.
This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.
Certain comments herein are based on current expectations and are considered “forward-looking statements.” These for-ward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.
