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I like reviewing the portfolios of experienced and successful professional investors as I search for investment ideas. The way I figure it, if an investment idea has made it past the screening process of one of the world's top investors then it is worth a look by little old me.

The more concentrated the investor the better. If a manager holds 20 stocks instead of 50, chances are that those 20 stocks have received more attention than a more diversified portfolio.

One of my favorites is Bob Rodriguez of FPA Capital. Since launching in 1984 the FPA Capital fund has returned 14.63% annually for investors which is much better than the 9.48% of its benchmark the Russell 2000 index.

I recently reviewed his Q4 2012 letter to shareholders and his portfolio. Here is his entire concentrated portfolio at December 31, 2012:

Company

Ticker

Industry

Market Value

Weighting

Cash

N/A

Cash

371,003,000

30.90%

Western Digital Corporation

WDC

Computer Hardware

85,664,000

7.13%

Rowan Companies PLC

RDC

Oil & Gas - Drilling

81,404,000

6.78%

Arrow Electronics Inc

ARW

Computer Hardware

80,752,000

6.72%

Avnet Inc

AVT

Computer Hardware

71,383,000

5.94%

Ensco PLC

ESV

Oil & Gas - Drilling

71,326,000

5.94%

Rosetta Resources, Inc.

ROSE

Oil & Gas - E&P

69,904,000

5.82%

Trinity Industries, Inc.

TRN

Transportation & Logistics

50,703,000

4.22%

InterDigital Inc

IDCC

Communication Services

37,839,000

3.15%

Oshkosh Corporation

OSK

Truck Manufacturing

37,564,000

3.13%

Newfield Exploration Company

NFX

Oil & Gas - E&P

29,115,000

2.42%

DeVry, Inc.

DV

Education

23,424,000

1.95%

Foot Locker Inc

FL

Retail - Apparel & Specialty

21,919,000

1.83%

Signet Jewelers Ltd

SIG

Retail - Apparel & Specialty

21,835,000

1.82%

SM Energy Co

SM

Oil & Gas - E&P

17,851,000

1.49%

Baker Hughes Inc.

BHI

Oil & Gas - Services

17,511,000

1.46%

Reliance Steel and Aluminum

RS

Industrial Products

17,097,000

1.42%

Patterson-UTI Energy, Inc.

PTEN

Oil & Gas - Drilling

15,729,000

1.31%

Atwood Oceanics, Inc.

ATW

Oil & Gas - Drilling

12,693,000

1.06%

Veeco Instruments Inc

VECO

Semiconductors

12,413,000

1.03%

Federated Investors, Inc.

FII

Asset Management

11,227,000

0.93%

Cimarex Energy Company

XEC

Oil & Gas - E&P

10,738,000

0.89%

Helmerich & Payne, Inc.

HP

Oil & Gas - Drilling

10,054,000

0.84%

Cabot Oil & Gas Corporation

COG

Oil & Gas - E&P

9,441,000

0.79%

Arris Group, Inc.

ARRS

Communication Equipment

9,006,000

0.75%

Alliant Techsystems Inc

ATK

Aerospace & Defense

3,247,000

0.27%

Total

1,200,842,000

100.00%

A few things stick out to me. One very obvious observation is that Rodriguez has a third of the fund in cash. He explains why:

In summary, we remain cautious with respect to U.S. economic growth for 2013 and believe stocks in general are not attractively priced to warrant a more aggressive allocation to equities. We continue to believe earnings growth for many companies will be challenged and struggle to meet the high expectations embedded in their current Price-to-earnings multiples. We further believe it is sensible to continue to maintain a high level of liquidity in the Fund, so we will have the ability to quickly deploy cash into attractive investment opportunities when they present themselves.

The easiest response to the Fund's cash position is to buy more equities and be fully invested, irrespective of valuations. We believe this is what many of our contemporaries are doing today. In the Morningstar fund database there are small cap value managers that own companies with the following characteristics: large positions trading at over 40x trailing-twelve months net income and more than 15x peak earnings and other positions that have generated positive net income only one year (in 2009) over the last decade. Investors should not be surprised that this occurs, given the pressures that managers are under with fully-invested mandates. Some of these "Value" funds should be called "I hope no one discovers what I am doing fund."

Your manager has not and will not play that game. We will, however, continue to remain vigilant, seeking companies that provide excellent risk-to-reward ratios and meet all of our strict investment criteria in the allocation of your capital. When our due diligence is complete and a stock meets all of our metrics, outlined in our Investment Policy Statement, we will at that point deploy your capital. This approach is what has driven our long-term gains over the past several decades, and we endeavor to maintain our investment discipline, so as to continue to seek to generate similar long-term returns into the future.

With respect to the equity positions that Rodriguez owns which represent 70% of his fund's assets, he has a very concentrated portfolio.

In total Rodriguez owns only 25 different stocks with a total of $829 million invested. 47% of that $829 million is invested in his top five holdings and 74% is invested in his top 10 holdings. That is very concentrated.

Rodriguez is also very focused on one sector in particular and that is energy. Of the 25 stocks he owns 11 of them are energy related, oil specifically. These stocks represent 41% of the cash that Rodriguez has invested in equities.

Company

Ticker

Industry

Market Value

Weighting

Rowan Companies PLC

(NYSE:RDC)

Oil & Gas - Drilling

81,404,000

9.81%

Ensco PLC

(NYSE:ESV)

Oil & Gas - Drilling

71,326,000

8.60%

Rosetta Resources, Inc.

(NASDAQ:ROSE)

Oil & Gas - E&P

69,904,000

8.42%

Newfield Exploration Company

(NYSE:NFX)

Oil & Gas - E&P

29,115,000

3.51%

SM Energy Co

(NYSE:SM)

Oil & Gas - E&P

17,851,000

2.15%

Baker Hughes Inc.

(NYSE:BHI)

Oil & Gas - Services

17,511,000

2.11%

Patterson-UTI Energy, Inc.

(NASDAQ:PTEN)

Oil & Gas - Drilling

15,729,000

1.90%

Atwood Oceanics, Inc.

(NYSE:ATW)

Oil & Gas - Drilling

12,693,000

1.53%

Cimarex Energy Company

(NYSE:XEC)

Oil & Gas - E&P

10,738,000

1.29%

Helmerich & Payne, Inc.

(NYSE:HP)

Oil & Gas - Drilling

10,054,000

1.21%

Cabot Oil & Gas Corporation

(NYSE:COG)

Oil & Gas - E&P

9,441,000

1.14%

Total

345,766,000

41.67%

Why is Rodriguez so heavily invested in the oil sector? The answer is pretty simple, he is bullish on oil as he explains below:

Despite this selling, we still retain most of our initial investment in the energy sector. We continue to have conviction in our energy holdings, which are now primarily oil focused.

Oil is a global commodity that has a heavy exposure to global-demand growth and in particular that of the developing economies. We believe growth in the developing economies will exceed that of developed ones and oil will be one of the beneficiaries of this. Oil production also has a sharp decline curve, roughly 9% according to the International Energy Agency, which makes it difficult to grow supply. Importantly, this high decline rate not only enhances the upside, but also potentially helps protect the investments in a recessionary environment, since supply and demand get back into equilibrium much faster.

Lastly and most imperative, oil in the ground and assets used to produce it, should provide a store of value against potential future monetary inflation.

I have to admit that I hope Rodriguez is on the mark with his predictions, my portfolio is poised to benefit from the same factors.

Source: Why FPA Capital's Rodriguez Has 42% Of His Equity Positions In Energy Stocks