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Wayne, PA-based Investment Adviser Schneider Capital Management, headed by chief investment officer Arnold Schneider, manages over $2.7 billion in two mutual funds and in separately managed accounts. Its Schneider Small Cap Value Fund has generated 10.49% average annual return for the last 10 years and 16.04% since inception in 1998 versus 8.2% and 9.65% for the comparable Russell 2000 Value Index. Its Schneider Value Fund that invests in stocks of companies that have a market cap greater than $1 billion generated 9.38% average annual return since inception in 2002 versus 8.58% for the comparable Russell 1000 value index.
The firm was founded by Schneider in 1996, and employs a disciplined, deep-value investing approach to picking its investments. The fund holds a moderately diversified portfolio of over 150 positions, and slightly over half its holdings are in large-caps, over 25% in mid-caps and the remaining 20-25% in small-cap equities. Its portfolio turnover is between 60-70%, implying an average holding period of one and a half years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that its portfolio is over-weight in the financial and consumer durable goods sectors, and it is under-weight the healthcare and consumer non-durable goods sectors.
Within sectors, on a more disaggregated level, my prior analysis of its SEC 13-F filings for the December 2010 quarter had revealed that it was over-weighted in the midstream and downstream oil and gas industry group, the aerospace and defense industry group, the construction industry group, and the coal mining group. Based on a review of the most recent SEC 13-F filing for the March 2011 quarter, we determined that it significantly increased its weighting in the coal mining and construction industry groups, and that it maintained its over-weighting in the midstream and downstream oil and gas industry group. It significantly reduced its weighting in the aerospace and defense industry group, but most likely will continue to be among the funds that are most over-weight this group as well; this will be verified soon in a follow-up article series where I will examine, based on the March 2011 13-F filings, which funds are most over-weight specific industry groups and their new picks and pans from within those industry groups.
The following summarizes its new picks and pans in the latest reported 13-F filing for the March 2011 quarter:
  • International Rectifier Corp. (NYSE:IRF) manufactures high and low voltage, digital and analog power management ICs, gate bi-polar transistors, and DC-AC converters. This position was initiated at the end of 2005, probably in the mid-$30s, but with the stock having gone up over three-fold recently from the $10 lows in fall of 2008, the selling of this position could be just normal profit taking. But its selling out of the position completely makes it a conviction sell.
  • Chesapeake Energy (NYSE:CHK) is engaged in the exploration and production of natural gas and crude oil properties throughout the U.S. The position was initiated in the quarter ended September 2008, when the stock was extremely volatile and traded between $30 and $70. With the stock up three-fold from the $10 lows to recent highs above $35, its selling half of the position does not appear to be a conviction sell.
  • Magna International Inc. (NYSE:MGA) manufactures automotive systems, assemblies, modules, components and complete vehicles for automotive OEMs. The position was initiated in mid-2005, probably in the mid-$30s, but with the stock up over six-fold recently from the $10 lows in early 2009, the selling of half of its $37 million position during the quarter appears to be just normal profit taking.
  • RenaissanceRe Holdings (NYSE:RNR) offers property catastrophe, specialty and individual risk coverage for insurance and reinsurance firms worldwide. This is a high conviction buy, as Schneider added $12 million to its prior $15 million position while the stock is trading at all-time highs.
  • Cloud Peak Energy (NYSE:CLD) produces coal in the Powder River Basin through three wholly-owned surface coal mines in WY and MT. Schneider added $10 million to its prior $60 million position during the quarter.
  • Carnival Corporation (NYSE:CCL) operates cruise vacations with a total of 98 ships under ten brands servicing North America, Asia, Australia and Europe. Schneider doubled on its prior $10 million position during the quarter while the stock has gone up three-fold since the $15 lows in fall of 2008, thus making it a conviction buy.
  • Annaly Capital Management Inc. (NYSE:NLY) is a REIT that owns, manages, and finances mortgage pass-through certificates and collateralized mortgage obligations. Schneider sold $9 million of a $20 million position during the quarter.
  • JC Penney Co Inc. (NYSE:JCP) operates 1,106 department stores in 49 states and Puerto Rico offering apparel, jewelry and furniture. Schneider sold $10 million of a $29 million position during the quarter.

The following table summarizes its largest holdings that were mostly unchanged during the March 2011 quarter (including any Schedule 13D filings since the end of the quarter):

  • Arch Coal Inc. (NYSE:ACI) is engaged in the production of steam and metallurgical coal from surface and underground mines. This is a high conviction hold as at $151 million it is its largest position by far in the portfolio.
  • Consol Energy Inc. (NYSE:CNX) produces bituminous coal and coal-bed methane gas primarily in the northern and central Appalachian and Illinois basins. At $86 million it is still its second largest holding, and it too represents a high conviction hold as it also added $2 million to that position during the quarter.
  • PNC Financial Services Group (NYSE:PNC) is a holding company for PNC Bank operating 2,470 branches in PA, NJ, DE, D.C., and 10 other states.
  • Dell Inc. (NASDAQ:DELL) provides desktop PCs, mobility products, servers and networking products to individuals, businesses and governments.
  • Genon Energy Inc. (GEN) provides electricity and energy services to wholesale energy markets in the U.S.
Table
Company
Ticker
New or Increased or Decreased or Unchanged Position
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
New Picks and Pans
International Rectifier Corp.
IRF
Decreased
$ 0 million
$ 47.34 million
Chesapeake Energy Corp.
CHK
Decreased
$ 42.66 million
$ 37.48 million
Magna International Inc.
MGA
Decreased
$ 22.9 million
$ 14.02 million
RenaissanceRe Holdings Ltd.
RNR
Added
$ 27.36 million
$ 11.72 million
Cloud Peak Energy Inc.
CLD
Added
$ 69.36 million
$ 10.21 million
Carnival Corp.
CCL
Added
$ 20.6 million
$ 10.19 million
Penney J C Inc.
JCP
Decreased
$ 18.77 million
$ 10.05 million
Annaly Capital Management Inc.
NLY
Decreased
$ 11.31 million
$ 8.77 million
Largest Holdings
Arch Coal Inc.
ACI
Decreased
$ 150.92 million
$ 2.98 million
Consol Energy Inc.
CNX
Added
$ 86.3 million
$ 2.19 million
PNC Financial Services Group Inc.
PNC
Decreased
$ 53.22 million
$ 0.6 million
Dell Inc.
DELL
Decreased
$ 47.79 million
$ 0.9 million
Genon Energy Inc.
GEN
Decreased
$ 45.1 million
$ 0.95 million
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Top New Conviction Buys and Sells by Schneider Capital Management