The Undervalued Holdings of the Decade’s Top-Performing Gurus

Investors often look to top fund managers to glean information on the best strategies and generate new investment ideas.

While it is never a good idea to simply invest in what famous investors have in their portfolios (at least not without conducting your own due diligence), it can provide a valuable starting point for further research. After all, the success of these fund managers is due to skill and research just as much as luck.

According to the GuruFocus Scoreboard, which tracks the fund performance of gurus based on their 13F filings, the firms with the highest average annual returns over the past decade were Ron Baron (Trades, Portfolio)’s Baron Funds with 23.70%, Frank Sands (Trades, Portfolio)’ Sands Capital Management with 20.10%, Spiros Segalas (Trades, Portfolio)’ Harbor Capital Appreciation Fund with 17.90%, Akre Capital Management with 17.20% and Elfun Trusts (Trades, Portfolio) with 15.30%.

In a previous article, I went over the top holdings of these gurus, which are the common stocks that take up the highest percentages of their equity portfolios. In this article, we will take a look at their holdings that could be undervalued according to the earnings-based discounted cash flow calculator and other valuation methods.

Tech picks

The undervalued tech stocks of the above-mentioned gurus include Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE:BABA), which is held by all except Akre Capital Management. This stock is also the only common stock trading below the DCF value among those held by Elfun Trusts (Trades, Portfolio). It has a DCF value of $243.86 per share while trading at $239.83 for a 1.65% margin of safety. The price-earnings ratio of 28 is lower than the company’s 10-year median of 39.24. Due partially to the strong growth that analysts expect from the company in the near future, the GuruFocus Value chart rates the stock as modestly undervalued.


The chart below shows that more gurus have been buying the stock than selling it in recent quarters.


Align Technology Inc. (NASDAQ:ALGN) is in the portfolios of both Baron and Sands’ funds. The orthodontics company, which manufacturers the Invisalign aligners, has a DCF value of $639.11 while trading at $527.13 for a margin of safety of 17.52%. The price-earnings ratio of 23.51 is lower than both the industry median of 35.88 and its own 10-year historical median of 36.48. According to the Peter Lynch chart, the stock is trading above its intrinsic value but below its median historical valuation.


The below chart shows that more gurus have been selling the stock than buying it in recent quarters.


Other tech picks of these top-performing gurus include Lam Research Corp. (LRCX), which is held by Sands’ firm and has a 4.41% margin of safety, and VeriSign Inc. (VRSN), which is held by Baron’s firm and has a 4.03% margin of safety.


On the financials front, U.S. corporate-focused investment banking company Goldman Sachs Group Inc. (NYSE:GS) appears in the portfolios of Baron Funds and Harbor Capital. It has a DCF value of $350.44 while trading at $345.60 for a 1.38% margin of safety. The price-earnings ratio of 13.95 is below the industry median of 18.36, but above the company’s own 10-year median of 11.75. The Peter Lynch chart shows the stock as being below its intrinsic value, but above its median historical valuation.


The below chart shows that over the past few quarters, gurus have been buying and selling the stock in roughly equal numbers.



Home improvement retailer The Home Depot Inc. (NYSE:HD) also appears in the portfolios of both Baron Funds and Harbor Capital. The stock has a DCF Value of $332.95 while trading at $287.32, giving it a margin of safety of 13.70%. With a price-earnings ratio of 24.24, the stock is trading above the industry’s median price-earnings ratio of 22.59 and its own 10-year median of 21.86. The GF Value chart rates the stock as fairly valued, as the price may have already caught up with growth expectations.


According to the chart below, gurus have mostly been selling the stock in recent quarters, though some have been buying.


Aftermarket automotive parts retailer O’Reilly Automotive Inc. (ORLY), held by Akre Capital Management, has a margin of safety of 27.27%. Additionally, Sands’ firm owns shares of Dollar General Corp. (DG), which has a 23.90% margin of safety.


Leading U.S. health insurance company Humana Inc. (NYSE:HUM) is held by both Harbor Capital and Baron Funds. With a DCF value of $430.57, the company trades at $412.67 for a 4.16% margin of safety. The price-earnings ratio of 16.19 puts the valuation below the industry median of 20.13 and at about the same level as its own 10-year median of 16.17. The GF Value chart rates the stock as fairly valued.


More gurus bought the stock than sold it in the most recent quarter, a reversal from the four quarters preceding it.


Another stock that appears in the portfolios of both Akre Capital Management and Baron Funds is the Class A shares of Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (NYSE:BRK.A). Akre’s firm also owns B Class shares of the company, which trade under the ticker (NYSE:BRK.B). Berkshire is classified as an insurance company because that is where the majority of its operations are, though it is technically a conglomerate with many businesses under its umbrella and a sizable equity portfolio. Berkshire’s Class A shares have a DCF value of $453,478.90 while trading at $380,213.39, resulting in a 16.16% margin of safety.

However, valuation metrics can get tricky for this stock due to an accounting rule change in 2018 that requires unrealized gains in the equity portfolio to be recorded as part of both revenue and net income. As we can see in the chart below, this skews the metrics quite a lot:


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