Citigroup (C) Supplanted Atop Diamond Hill Capital’s Portfolio in Q1

Founded in 2000 by Ric Dillon, Diamond Hill Capital employs a value investing approach to stock picking and had approximately $18 billion in assets under management at the end of April. Mr. Dillon and his team focus their investment efforts on a long-term horizon, which is reflected in the top holdings of Diamond Hill as disclosed in its latest 13F filing, with three out of the top five positions having been established more than nine years ago. At the end of March, the fund’s equity portfolio carried holdings valued at $15.7 billion, with roughly a quarter of that invested in financial stocks and 18% of it devoted to consumer discretionary stocks. Over the course of the first quarter, Mr. Dillon and his managing partner Chuck Bath have done some shaking up of Diamond Hill Capital’s equity portfolio. In this article we’ll take a closer look at some of those changes and the portfolio’s current constitution.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see more details here).

Long-Term Energy Bet

First up is Cimarex Energy Co (NYSE:XEC), a Colorado-based oil and gas exploration company and one of Diamond Hill’s long-term investments, as the fund first reported a stake in the company at the end of 2003. Over the prevous quarter, the fund’s position in the stock was increased by 1% to 3.74 million shares worth approximately $363 million. Cimarex Energy Co (NYSE:XEC) recently reported first quarter results that missed Wall Street’s expectations. The company registered a loss of $186.1 million or $0.40 per share when adjusted for one-time costs, while revenue tumbled by 33% year-over-year to $240 million. Both figures were below analysts’ expectations, with them having anticipated a loss of $0.38 per share on the back of $248 million in revenue. As the stock was hammered from the middle of 2014 through the end of 2015 due to the slump in the oil markets, so too has it changed direction in 2016 thanks to oil’s modest recovery, with the stock currently up by 29% this year. Curtis Schenker and Craig Effron’s Scoggin holds a small stake in Cimarex Energy Co (NYSE:XEC) of 68,625 shares worth $6.67 million on March 31.

UTX Stake Reduced

Mr. Dillon and his team decided to reduce the fund’s holding in United Technologies Corporation (NYSE:UTX) by 4% to 3.73 million shares valued at $373 million at the end of March. According to a recent note to investors, analysts at RBC Capital have cut their rating on United Technologies Corporation (NYSE:UTX) to ‘Sector Perform’ from ‘Outperform’ and reduced their price target to $108 per share from $109. The company reported first quarter results at the end of April, which amounted to a 16% drop in profit, while sales were flat. Nonetheless, the revenue of $13.4 billion and adjusted earnings of $1.47 per share managed to top analysts’ estimates of $13.03 billion in revenue and earnings of $1.38 per share. The results had additional significance after the company’s merger talks with Honeywell International Inc. (NYSE:HON) fell through in early March. Billionaire Ken Fisher‘s Fisher Asset Management indicated a 2% increase to its holding of United Technologies Corporation (NYSE:UTX) in its latest 13F filing, to 8.37 million shares worth $875 million at the end of March.

Head over to the next page to find out about Diamond Hill Capital’s top-3 positions.

Still Bullish on Medical Device Maker

First established in 2012, Diamond Hill’s stake in Boston Scientific Corporation (NYSE:BSX) was boosted by 3% during the first quarter, to approximately 20.3 million shares worth more than $382 million at the end of March. The medical device maker’s stock has been on a roll this year, ending the May 13 trading session up by 21% year-to-date. Boston Scientific Corporation (NYSE:BSX) released its first quarter results on April 27, and managed to beat analysts’ estimates. The company posted adjusted earnings of $0.28 per share on the back of $1.96 billion in revenue, the latter figure being up by 11% year-over-year. Shares surged by 11% following the report and spiked through the $21.36 level for the first time since the company completed its acquisition of Guidant, dubbed the second-worst deal ever by Fortune magazine back in 2006. David Keidan’s Buckingham Capital Management also holds a position in this stock, totaling 647,088 shares valued at $12.1 million at the end of March.

Struggling Finance Pick

The fund’s management team seems to be bullish on Citigroup Inc (NYSE:C), having increased the size of their investment in the stock by 21% during the first three months of this year. Nonetheless, the holding fell to second spot with the fund’s portfolio in terms of value, as the stock suffered a weak first quarter. The second quarter has been more positive, as despite a 27% year-over-year drop in net income, Citigroup’s first quarter financial results announced on April 15 still managed to beat the market’s expectations. The company posted $17.55 billion in revenue and earnings of $1.10 per share for the quarter, above expectations of $1.05 per share on the back of $17.53 billion in revenue. Citigroup’s management has embarked on a cost-cutting quest and the first results have were shown by way of operating costs falling by 3% during the quarter. Citigroup Inc (NYSE:C) is currently trading at a trailing price-to-earnings ratio of 8.09, which is roughly half the industry average of 15.80 according to Yahoo Finance. Harris Associates, a subsidiary of Natixis Global Asset Management, disclosed a new position in Citigroup Inc (NYSE:C) of 28.7 million shares worth $1.2 billion at the end of March.

New King of the Portfolio

Abbott Laboratories (NYSE:ABT) was Diamond Hill Capital’s number one holding heading into the second quarter. This is also one of the fund’s oldest holdings, first taking up residence in its portfolio at the end of 2004. According to its latest quarterly filing, the fund holds roughly 10.2 million shares of the company as of March 31, up by 18% quarter-over-quarter and worth in excess of $426 million. Abbott Laboratories (NYSE:ABT) recently offered to acquire St. Jude Medical, Inc. (NYSE:STJ), a developer of cardiovascular medical devices, for $25 billion. As is usually the case, Abbott’s stock registered a significant drop shortly after, as arbitrageurs were scrambling to profit from the deal. Before the announcement, Abbott shares were close to level for the year. The deal, which is expected to close by the end of 2016, will help Abbott’s medical device business, a division that was seen as a drag on the company’s growth by a number of analysts, compete with the likes of Medtronic PLC (NYSE:MDT) and Boston Scientific Corporation (NYSE:BSX). Mehdi Mahmud’s First Eagle Investment Management also holds a significant stake in Abbott Laboratories (NYSE:ABT) that amounts to 7.51 million shares valued at $314 million on March 31.

Disclosure: None