Private Capital Management’s mutual funds have delivered a market-beating, phenomenal 15.5% compound return over the last 24 years since the fund's inception. The company manages $1.6 billion using a value investing philosophy, and with holdings across the capitalization spectrum. Two attractive buys from its portfolio include Motorola Mobility Holdings (MMI) and Nu Skin Enterprise (NUS). Furthermore, a conviction sell from its portfolio is Sprint Nextel Corp. (S).
Naples, Florida-based Private Capital Management (PCM), led by CEO and Portfolio Manager Gregg Power, manages $1.6 billion in mutual funds and in separately managed accounts for high net worth individuals and institutional investors. PCM's investment approach is to identify under-valued companies that can attain their perceived intrinsic value over an acceptable time horizon, which in PCM’s case is three to five years, based on the average three year holding period for positions in its portfolio. Its two mutual funds have returned 15.5% compound annual returns or 3,100% cumulative returns since fund inception in 1987 versus the 9.6% annualized or 800% cumulative return of the S&P 500 over the same period.
The fund holds a moderately diversified portfolio of 77 positions, with approximately a third of its holdings equally distributed between large-caps, mid-caps and small-caps. Its portfolio turnover is 30%-35%, implying an average holding period of three years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight transportation (4%), technology (37%) and healthcare (21%) sectors, and it is under-weight consumer non-cyclical (2%), basic materials (1%), energy (5%) and utility (0%) sectors, compared to the weighting of these sectors in the overall economy.
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:
Technology sector: Buy Motorola Mobility Holdings (MMI). PCM added $40 million to its $540 million position from the previous quarter, including adding a new $21 million position in SAIC Inc. (SAI), a provider of scientific engineering system integration and technical services, primarily to U.S. government entities. a new $23 million position in Motorola Mobility Holdings (MMI), a manufacturer of wireless handsets, set-top boxes and video distribution systems for home, network and telecom markets. MMI is an attractive buy as it trades at a forward 15 price-to-earnings (P/E) based on fiscal year 2012 earnings, and it is projected to grow revenue and margins strongly in the near term. Furthermore, analyst targets for MMI are in the mid-$30s to $40 range. BMC trades at a forward 16 P/E, which is mid-range based on its historic P/E range. It has been up strongly 60% in the last year while revenues and earnings are up only in the teens.
Healthcare sector: PCM added $50 million to its prior $275 million prior quarter position, adding a new $43 million position in Warner Chilcott Plc (WCRX), a developer of branded prescription drugs for women’s healthcare, dermatology, gastroenterology and urology, and adding $16 million to its prior $3 million position in Prestige Brands Holdings (PBH), a marketer of OTC sore-throat drugs, liquid bandages, wart remover, household cleaning products and other items. Warner Chilcott trades at a forward P/E of 6, cheap by historic standards. But earning growth is expected to be tepid going forward in the high single digits, making it slightly undervalued at current levels. PBH is fairly valued, trading at a forward P/E of 13 which is in the mid-range of its historic range. Growth is expected to moderate going forward.
Financial sector: PCM cut $20 million from its $250 million prior quarter position. However, this was accomplished with some re-shuffling, including adding $11 million to its prior $18 million position in CoreLogic (CLGX), a provider of title insurance, escrow and related financial services to residential and commercial real estate transactions. The position in CoreLogic was opened in the $19 range in mid-2010, so PCM adding to this position in the last quarter is a further sign of its conviction in this position.
Service sector: Sell Sprint Nextel Corp. (S). PCM cut $35 million from its $230 million prior quarter position, including selling out completely a $29 million position in wireless voice and data services provider Sprint Nextel Corp. (S), and selling $10 million out of its $34 million position in International Game Technology (IGT), a manufacturer of computerized casino gaming machines and systems such as spinning reel slot and video gaming machines. The position in International Game was opened in the $5 range in 1999, so PCM selling a portion of that position is profit-taking. The position in Sprint was opened in the high-teens at the end of 2007, so the selling out at a loss is significant and conveys the fund's bearish outlook on the stock, and PCM's lack of confidence in management’s turnaround plan. The fundamentals of the stock are not good as the company has been incurring losses for the last few years, and the balance sheet has more than $15 billion in net-debt, which is equal to the $15 billion market-cap.
Consumer non-cyclical sector: Buy Nu Skin Enterprise (NUS). PCM added a new position, its first in this sector, by buying a new $21 million position in Nu Skin Enterprise, a network marketer of anti-aging personal care products and nutritional supplements under the Nu Skin and Pharmanex brands. Nu Skin is a baby boomer stock, and it has been reporting phenomenal revenue and earnings growth every quarter. The stock trades at a premium 15 forward P/E, but that is not so expensive given the strong growth and the promising outlook for the company’s products, and given the aging population in the U.S. and worldwide. Analyst targets are currently in the high-$30s, but as is the case with any such high growth company, one can expect these targets to keep getting raised as the company continues to beat numbers.
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
Top Buys and Sells
Warner Chilcott Plc Ireland
$ 43 million
Sprint Nextel Corp.
$ 0 million
Motorola Mobility Holdings
$ 23 million
Nu Skin Enterprises Inc/
$ 21 million
$ 21 million
Prestige Brands Holdings
$ 19 million
Cisco Systems Inc.
$ 25 million
$ 29 million
Raymond James Financial Inc.
$ 42 million
Intl. Game Technology
$ 24 million
$ 31 million
$ 109 million
$ 77 million
Valeant Pharmaceuticals Intl.
$ 70 million
Sources: 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.