Howard Marks’ Oaktree Weakens Super Micro Computer Connection

Howard Marks (TradesPortfolio)’ Oaktree Capital Management disclosed earlier this week it trimmed its Super Micro Computer Inc. (NASDAQ:SMCI
) stake by 14.14%.

Founded by Marks and several fellow investors in 1995, the Los Angeles-based alternative asset management firm focuses on delivering superior results while observing its six-tenet investment philosophy, which consists of risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing. While it specializes in credit strategies, the firm also invests in high-yield bonds, convertible securities, distressed debt, real estate, control investments and listed equities.

According to GuruFocus Real-Time Picks, a Premium feature, the firm sold 469,176 shares of the San Jose, California-based information technology company on March 24, impacting the equity portfolio by -0.37%.

Oaktree now holds 2.85 million shares total, accounting for 2.28% of the equity portfolio. GuruFocus estimates the firm has gained 47.85% on the investment since establishing it in the third quarter of 2018.

Also known as Supermicro, the company, which provides high-performance server technology services to cloud computing, data center and internet of things embedded markets, has a $1.99 billion market cap; its shares were trading around $39.30 on Thursday with a price-earnings ratio of 23.99, a price-book ratio of 1.82 and a price-sales ratio of 0.65.

The GF Value Line indicates the stock is significantly overvalued currently based on its historical ratios, past performance and future earnings projections.

The valuation rank of 6 out of 10, however, leans more toward undervaluation even though the share price and price-sales ratio are approaching multiyear highs.

On Feb. 2, Supermicro reported its second-quarter 2021 financial results, posting earnings of 52 cents per share on $830 million in revenue.

In a statement, Chairman and CEO Charles Liang noted revenue was at the midpoint of the company’s guidance range, “driven by strong sequential growth in sales to our international customers in a variety of countries, which demonstrates the breadth and strength of our channel partnerships around the world.”

“Recently strong bookings also give us confidence in our outlook to resume year-over-year growth in Q3,” he added. “We are excited about our robust pipeline of innovative products and aim to continue to grow through the remainder of fiscal 2021 and drive further growth in fiscal 2022.”

GuruFocus rated Supermicro’s financial strength 8 out of 10 on the back of a comfortable level of interest coverage as well as a high Altman Z-Score of 4.3, which indicates the company is in good standing. The return on invested capital, however, is eclipsed by the weighted average cost of capital, indicating it may struggle to create value.

The company’s profitability also fared well with a 7 out of 10 rating. Even though the operating margin is in decline, Supermicro is supported by returns that outperform over half of its competitors. It also has a moderate Piotroski F-Score of 5, indicating business conditions are stable, but the predictability rank of one out of five stars is on watch as a result of revenue per share declining over the past 12 months. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Oaktree is Supermicro’s largest guru shareholder with a 5.63% stake. Other guru investors include Richard Pzena (TradesPortfolio), Hotchkis & Wiley, Richard Snow (TradesPortfolio), Lee Ainslie (TradesPortfolio), John Hussman (TradesPortfolio), Jeremy Grantham (TradesPortfolio), Jim Simons (TradesPortfolio)’ Renaissance Technologies, Paul Tudor Jones (TradesPortfolio) and Pioneer Investments (TradesPortfolio).

Portfolio composition

Oaktree’s $4.66 billion equity portfolio, which was composed of 59 stocks as of Dec. 31, is heavily invested in the financial services sector, followed by smaller positions in the utilities and energy spaces. Technology stocks occupy 8.37%.

Other technology stocks Marks’ firm held as of the end of the fourth quarter were MagnaChip Semiconductor Corp. (NYSE:MX), Infenera Corp. (NASDAQ:INFN), Bel Fuse Inc. (NASDAQ:BELFB)(NASDAQ:BELFA), Kingsoft Cloud Holdings Ltd. (NASDAQ:KC) and Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM).

Disclosure: No positions.

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