Pzena Investment Management’s Top Stock Picks Ahead of Q2; Two Leading Oil and Gas Companies Among Top Holdings

Pzena Investment Management is a value-oriented investment management firm founded by Richard S. Pzena in 1995. The firm’s investment philosophy solely focuses on a classic, deep value approach to investing, which involves buying good businesses at low prices. In particular, the New York-based investment firm seeks companies that are underperforming their historically-demonstrated earnings power and ones which it believes could solve the issues causing that underperformance. In mid-March, Mr. Pzena said during CNBC’s ‘Halftime Report’ that “After five years of underperformance of value versus growth, the spreads in valuations are at provocative levels”, suggesting that these spreads may be very rewarding. With this in mind, let’s have a look at Pzena Investment Management’s top-5 holdings as of the end of March, as well as briefly touch on the recent performance of those positions.

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#5 Franklin Resources Inc. (NYSE:BEN)

 – Number of shares held by Pzena (as of March 31): 10.60 Million

 – Value of Pzena’s holding (as of March 31): $413.84 Million

In the first quarter of 2016, Pzena Investment Management upped its position in Franklin Resources Inc. (NYSE:BEN) by 11%. The increased stake was valued at $413.84 million on March 31 and accounted for 2.5% of Pzena’s equity portfolio. The top- and bottom-line figures of the global investment management organization dropped in the second quarter of fiscal year 2016 ended March 31, as assets under management continue to decline. Franklin’s total AUM on March 31 amounted to $742.6 billion, which marked a decrease of 4% relative to the figure recorded on September 30 and a decrease of 16% year-over-year. The investment firm has also been hit by fast-growing demand for low-fee passive products such as exchange-traded funds, which are favored at the expense of mutual funds. Nonetheless, the management team at Franklin Resources is planning on expanding the reach of its operations into the ETF market. Eric Sportt’s Sprott Asset Management owns 247,000 shares of Franklin Resources Inc. (NYSE:BEN) as of March 31.

#4 Exxon Mobil Corporation (NYSE:XOM)

 – Number of shares held by Pzena (as of March 31): 4.98 Million

 – Value of Pzena’s holding (as of March 31): $416.33 Million

The value-oriented investment firm trimmed its Exxon Mobil Corporation (NYSE:XOM) stake by roughly 17% during the January-to-March period, ending the quarter with 4.98 million shares worth $416.33 million. The world’s largest publicly-traded oil and gas company has seen its market value gain 14% since the beginning of 2016. Exxon has increased its annual dividend payment for 33 consecutive years and may continue to do so, though crude oil prices remain at low levels. The company’s net earnings came in at $16.15 billion in 2015, slightly less than half of the $32.52 billion it raked in during 2014. The world’s fourth-largest company by market capitalization paid out $12.09 billion of those earnings to shareholders in 2015, in the form of dividend payments, which yielded a payout ratio of 75%. Although the company’s payout ratio is on track to exceed 100% for 2016, Exxon nonetheless increased its quarterly dividend payment to $0.75 per share from $0.73 earlier this year. Ken Fisher’s Fisher Asset Management reported ownership of 4.54 million shares of Exxon Mobil Corporation (NYSE:XOM) as of March 31.

Pzena Investment’s top-3 holdings are discussed on the next page.

#3 Oracle Corporation (NYSE:ORCL)

– Number of shares held by Pzena (as of March 31): 10.41 Million

– Value of Pzena’s holding (as of March 31): $425.96 Million

The New York-based firm’s exposure to Oracle Corporation (NYSE:ORCL) was reduced by 335,871 shares during the March quarter, to 10.41 million shares, which were valued at $425.96 million on March 31. Numerous news outlets recently discussed the ongoing battle between software giant Oracle and Alphabet Inc. (NASDAQ:GOOG)’s Google, which could have an impact on how software is licensed and protected. Oracle has been accusing the search giant of using its Java programming language to develop Android without permission and is going after Google in a trial in San Francisco federal court that could last several weeks. Oracle shares have gained 8% since the beginning of 2016 and trade at a forward P/E multiple of 14.0, which is significantly below the ratio of 36.9 for the application software sector and the ratio of 17.6 for the S&P 500 Index. Donald Yacktman’s Yacktman Asset Management had 20.18 million shares of Oracle Corporation (NYSE:ORCL) in its equity portfolio at the end of March.

#2 Parker-Hannifin Corp (NYSE:PH)

 – Number of shares held by Pzena (as of March 31): 3.93 Million

 – Value of Pzena’s holding (as of March 31): $436.26 Million

Pzena Investment Management boosted its holding in Parker-Hannifin Corp (NYSE:PH) by 87,730 shares during the first quarter, to 3.93 million shares worth $436.26 million at quarter’s end. The shares of the diversified manufacturer of motion and control technologies and systems are 16% in the green year-to-date. Parker-Hannifin has paid 264 consecutive quarterly dividends and has increased its annual dividend distributions for 60 straight years, which makes the company one of the longest-living Dividend Kings within the S&P 500 family. The company’s dividend payments equate to an annual yield of 2.24%, slightly above the 2.12% dividend yield offered by the entire S&P 500 Index. Parker-Hannifin’s net sales for the nine months that ended March 31 were $8.40 billion, down from $9.57 billion reported a year earlier. Currency exchange headwinds impacted the top-line figure by $372 million, so the recent weakness in the U.S dollar may drive up the company’s net sales. Joe Dimenna’s Zweig Dimenna Partners initiated a 46,827-share position in Parker-Hannifin Corp (NYSE:PH) during the March quarter.

#1 Royal Dutch Shell plc (ADR) (NYSE:RDS.A)

 – Number of shares held by Pzena (as of March 31): 1o.02 Million

 – Value of Pzena’s holding (as of March 31): $485.45 Million

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) was the largest equity holding in Pzena’s portfolio at the end of March, consisting of 10.02 million Class A American Depositary Shares (ADSs). Each ADS is equivalent to two Royal Dutch Shell ordinary shares. The stake was increased by 50,194 ADSs during the March quarter. The independent oil and gas company recorded net income of $1.55 billion for the first quarter of 2016, slightly down from $1.57 billion reported for the fourth quarter and significantly below the $3.74 billion recorded for the first quarter of 2015. Analysts previously anticipated a bottom-line figure of $1.04 billion. Just recently, Royal Dutch Shell evacuated unnecessary staff from its Eja oil field off the Nigerian coast after one of Chevron Corporation (NYSE:CVX)’s offshore facilities was attacked by a militant group called the Niger Delta Avengers, which threatened more attacks on foreign oil companies that operate in Nigeria. Royal Dutch Shell’s ADSs have gained 10% in value year-to-date. Russell Lucas’ Lucas Capital Management owns 28,910 ADSs of Royal Dutch Shell plc (ADR) (NYSE:RDS.A) as of March 31.

Disclosure: None