Diamond Hill Select Fund Gain On TJX, AAPL, ENH, IBM

Diamond Hill Select Fund Gain On TJX, AAPL, ENH, IBM

Diamond Hill Select Fund commentary for the third quarter 2014.

Diamond Hill Select Fund decreased 1.73% (Class I) during the quarter, compared to a 0.01% increase in the Russell 3000 Index.

During the quarter, the Fund’s holdings in the industrials, energy, and financials sectors were the largest detractors from absolute return. Holdings in the information technology and consumer discretionary sectors contributed to return.

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The Fund’s underperformance relative to the Russell 3000 Index was primarily the result of security selection in the industrials, health care, and financials sectors. Security selection in the consumer discretionary sector and an underweight position in the energy sector contributed to relative return.

Diamond Hill Select Fund Third: Best Performers

  • Shares of software provider Microsoft Corporation (NASDAQ:MSFT) advanced following strong quarterly earnings driven by growth in the cloud computing business. Investors also responded favorably to the announcement of a significant cost-cutting program focused on the newly-acquired Nokia division.
  • Discount apparel retailer The TJX Companies, Inc. (NYSE:TJX) reported solid second quarter results. Inventory remained well controlled, which should benefit future merchandise margins. Europe (UK, Western Europe) continued to post impressive results from both a sales and profitability standpoint, which is important as a good portion of future growth rests on this segment. We believe the company continues to be uniquely positioned to capture market share in an environment dominated by value.
  • Mobile communication and media device company Apple Inc. (NASDAQ:AAPL) reported strong earnings for the quarter primarily due to the strength in its iPhone segment, which was driven by high growth in China and other emerging market countries. The stock price also appreciated in anticipation of the new products and product categories that were announced late in the quarter.
  • Property and casualty insurance company Endurance Specialty Holdings Ltd. (NYSE:ENH) recovered much of its first quarter loss when the company announced the termination of its contentious battle to acquire Aspen Insurance Holdings Limited (NYSE:AHL) after an AHL shareholder vote failed to provide convincing support for Endurance’s offer.
  • Diversified information technology company International Business Machines Corp. (NYSE:IBM) reported second quarter earnings that demonstrated continued execution of the company’s long-term plans. Revenue in the Systems & Technology (hardware) segment as well as revenue in China, two areas of recent concern, improved during the quarter leading to less investor pessimism about the future.

Diamond Hill Select Fund Third: Worst Performers

  • Shares of freight transportation management company Hub Group Inc (NASDAQ:HUBG) declined as slower train speeds and longer dwell times by the rails are increasing costs and impacting volumes for Hub Group. These issues are likely to persist into 2015, but the railroads are taking steps to increase capacity and improve service levels. It does not appear that lower service levels are impacting shippers’ attitudes toward longer-term conversion to intermodal.
  • Oil and gas exploration and production companies Cimarex Energy Co (NYSE:XEC) and EOG Resources Inc (NYSE:EOG) declined in response to recent weakness in domestic crude oil prices. Company-specific fundamentals related to various domestic projects continue to be encouraging in the context of our longer-term outlook.
  • Financial services company Popular Inc (NASDAQ:BPOP), the largest bank in Puerto Rico, declined in response to continued weak Puerto Rican economic data.
  • Shares of Boston Scientific Corporation (NYSE:BSX) declined as investors focused on potential liabilities stemming from legal disputes. We continue to see improvement in revenue trends and believe they will be key factors in closing the discount to our estimate of intrinsic value over time.

Diamond Hill Select Fund Third: New Positions

We initiated a new position in diagnostic systems provider Alere Inc (NYSE:ALR). We believe the company has the potential to grow intrinsic value by focusing on cost savings, asset disposals, and debt pay-down. All three of these initiatives would represent avenues to unmask the true long-term earnings power of the company and its core point-of-care diagnostics business. We forecast earnings well above the current consensus estimates.

Diamond Hill Select Fund Third: Eliminated Positions

We eliminated our position in GlaxoSmithKline plc (ADR) (NYSE:GSK) due to concerns that the company will not be able to preserve the recent level of revenue or profitability generated by its respiratory franchise. Despite its development of high efficacy next generation respiratory drugs that have come to market in advance of Advair losing patent protection, the company is facing extreme pricing pressure from health care payors. Diversified machinery manufacturer Dover Corp. was eliminated as the stock price approached our estimate of intrinsic value.

See full Diamond Hill Select Fund 3Q14 Commentary here.

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