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Summary: Los Angeles-based mutual fund company First Pacific Advisors' (FPA) Crescent Fund headed by Steven Romnick has delivered stellar returns for its mutual fund and institutional clients. Four attractive buys from the FPA Crescent Fund portfolio include drilling services provider Rowan Co. (NYSE:RDC), drug store chain CVS Caremark (NYSE:CVS), discount retail chain Wal-mart (NYSE:WMT) and networking company Cisco Systems (NASDAQ:CSCO).

Los Angeles-based mutual fund company First Pacific Advisors manages $16.5 billion in assets, including $5 billion in fixed income and the rest in equity for its mutual fund and Institutional clients. The firms FPA Crescent Fund managed by Guru Steven Romnick has $6.7 billion in equity assets and has delivered 11.2% average annual return for the past ten years versus 3.3% for the S&P 500. The FPA Crescent Fund aims to provide, over the long-term, an equity-like return with less risk than the stock market. It seems that the fund has met its stated goal as fund returns have been positive even in the last three years at 6.5% when the broader market and many mutual and hedge funds have had negative returns. Specifically, in 2008 the FPA Crescent fund gave back only 20% while the broader market corrected 37%, and then in 2009 and in 2010 the fund generated still stellar returns at 28.4% and 12% versus S&P 500 returns of 26.5% and 15.1% over the same period.

The fund holds a moderately diversified portfolio of 105 positions, with 40% of its holdings in large-caps, another 50% in mid-caps, and the remaining 10% in small-cap equities. Its portfolio turnover is around 12%-15% implying an average holding period of six to eight years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight services (20%) and healthcare (14%) sectors, and it is under-weight basic materials (1%), consumer (4%), utility (0%) and financial (8%) sectors.

The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter:

  • Energy sector: Buy Rowan Co. Inc. (RDC). FPA cut $140 million from its $1.98 billion position in the prior quarter, including cutting $79 million from the $600 million position in U.K. offshore contract drilling services company Ensco Plc (NYSE:ESV). This includes its holdings in Pride International Inc. (NYSE:PDE) that was recently acquired by ESV, and the position cut was the PDE position after the announcement of the acquisition by ESV as they may not want to be even more overweight ESV after the acquisition. Furthermore, FPA cut $38 million from its $235 million position in Rosetta Resources Inc. (NASDAQ:ROSE), a company engaged in the exploration and production of oil and natural gas properties in the U.S. The ROSE position was opened in the $20 range at the end of 2006, so the selling off a portion as the stock $50 last quarter is just profit-taking. ROSE currently trades at a forward 25 price-to-earnings (P/E) ratio based on fiscal year December 2011 earnings and 13 P/E based on December 2012 earnings as earnings are projected to almost double in 2012 over 2011. Also, analyst targets for ROSE currently are in the $60s. BHI was bought in the $40 range in mid-2010, so the selling in the $70s last quarter was profit-taking. FPA s second largest holding is in drilling services provider (RDC). The position was opened in the mid-$30s at the end of 2006, and the stock is trading at an attractive forward 9 P/E based on fiscal year December 2012 projections as earnings are projected to grow strongly in 2012. Also, analyst targets for RDC are in the $50 range making it an attractive buy at these levels.
  • Services sector: Buy CVS Caremark (CVS) and Wal-mart Stores (WMT). FPA added $120 million to its prior quarter $1.14 billion position, including adding $65 million to its prior $168 million position in pharmacy drug store chain CVS Caremark Corp. and adding $59 million to its prior $120 million position in discount retailer Wal-mart Stores. The position in CVS was opened in mid-$30s in early 2010, so the buying of more shares in the mid-$30s last quarter is a conviction buy. CVS trades at a forward 13 P/E which is near the low-end of its historic P/E range and earnings are projected to grow at a healthy double-digit rate going forward, making it an attractive buy at current levels. The position in WMT was opened in the high-$40s at the end of 2006, so the buying of more shares in the mid-$50s is a sign of high conviction. WMT currently trades at a forward 12 P/E which is near the low end of its historic P/E range. WMT earnings are projected to grow at almost double digits going forward, and analyst targets are in the $60s, making this an attractive buy at these levels.
  • Technology sector: Buy Cisco Systems (CSCO). FPA added $115 million to its prior $940 million position, including opening a new $59 million position in networking products manufacturer Cisco Systems (CSCO), adding $48 million to its prior $90 million position in MSFT and adding $31 million to its prior $56 million position in Hewlett Packard Co. (NYSE:HPQ). CSCO is trading at a forward 9 P/E, well below its historic P/E trading range. The stock has been weak dropping almost 60% in the last six months to the $15 range. However, the company has almost $5 in net cash available and remains a leader in the networking space, and analyst targets for the stock are in the low-$20s, making the $15 current an attractive level at which to begin accumulating the stock.

Table

Company
Ticker
Action
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
Top Buys and Sells
Ensco Plc
Cut
$ 516 million
($79) million
6.98%
5.66%
CVS Caremark Corp.
Add
$ 233 million
$65 million
3.46%
0.50%
Wal Mart Stores Inc.
Add
$ 179 million
$59 million
2.66%
0.10%
Cisco Systems Inc.
New
$ 59 million
$59 million
0.88%
0.06%
Microsoft Corp.
Add
$ 138 million
$48 million
2.05%
0.06%
Rosetta Resources Inc.
Cut
$ 199 million
($38) million
2.95%
7.88%
Hewlett Packard Co.
Add
$ 87 million
$31 million
1.29%
0.10%
Anheuser Busch
Add
$ 111 million
$30 million
1.64%
0.12%
Baker Hughes Inc.
Cut
$ 89 million
($30) million
1.33%
0.28%
Johnson & Johnson
Add
$ 66 million
$26 million
0.98%
0.04%
Top Holdings
Rowan Cos Inc.
Cut
$ 300 million
($14) million
4.45%
5.32%
AON Corp.
Add
$ 259 million
$8 million
3.84%
1.48%
Western Digital Corp.
Add
$ 251 million
$0 million
3.73%
2.90%

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, 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.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.