Chou Opportunity Fund - Value Investor's 2014 Holdings

by: Safety In Value


Huge holding in Sears Holdings.

Reduced as it approaches fair value.

Large position in Resolute Forest Products.

The Chou Opportunity Fund (MUTF:CHOEX) is run by famed Canadian value investor Francis Chou. A few years ago he started an American version of his fund, which means his US stock picks are now available in the company's filings and on their website. Francis Chou has an excellent long term record in his Canadian fund, but the short term record of Chou Opportunity is that it hasn't kept up with the rising market. This is a common problem for value investors, and his performance has been hampered by a large weighting towards Sears Holdings (NASDAQ:SHLD).

Sears is the second largest position in the fund, and the manager had this to say in his recent year end letter.

The value of its real estate allows Eddie Lampert, the controlling shareholder and CEO, the time and money to effect the changes. If the transformation does not work out as expected, we believe the real estate values are high enough that we would not lose money in our investment at current prices after netting out all liabilities.

While this is not a unique thesis on SHLD, it is worth noting that the fund has 21% of its net assets in SHLD, and bit more in Sears Canada (SEARF) and Sears Hometown and Outlet (NASDAQ:SHOS). This indicates that he is willing to stake his performance record on the outcome for Sears. While that level of confidence from a noted value investor isn't first order information about the health of SHLD, it is certainly worth considering when making an investment decision.

The fund has reduced its position in (NASDAQ:OSTK), as it has appreciated dramatically during the year, and was the largest contributor to the funds return. In his annual letter he noted that the company was approaching its intrinsic value, so he felt compelled to sell the shares. This discipline is something investors can learn from, as falling in love with a company can be a risky way of investing, even when large gains have already been made.

The largest position in the fund is in Resolute Forest Products (NYSE:RFP), the former AbitibiBowater. The company is the largest producer of newsprint in North America, and has been recently diversifying into wood components, including specialty items such as bed frame components and finger joints. The company has benefited from a restructuring that occurred after the global recession which put its costs at a more reasonable base level. Valuation is low with the company trading well below book value and with an EV/EBITDA ratio of around 5 times.

Francis Chou is a value investor with an excellent long term record. His picks are worth considering for serious investors who are unconcerned with liquidity. Because his largest holdings are in out of favor sectors, and he runs a concentrated portfolio, the fund is subject to large swings in value. However, well selected value stocks should eventually turn out well. These companies are worth further consideration, as is the fund.

Disclosure: I am long SHLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Net long position in SHLD held via options