Tracking The Sequoia Fund - Q1 2016 Update

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Includes: AMIGY, CAB, CFRUY, CNQ, CNSWF, COIHY, COST, DHR, EME, EXPD, FAST, GOOG, GOOGL, HCXLY, IBM, IDXX, JEC, MA, MHK, OMC, ORLY, PCP, PRGO, PX, RYCEY, SEQUX, SIRO, TIF, TJX, TRMB, VRSK, VRX, WAT, WMT, WST, XRAY, ZTS
by: V is for Value

Summary

For the first quarter the fund lost 11.29% versus a gain of 1.35% for the S&P 500. The disparity can be attributed to losses from Valeant Pharmaceuticals.

Top 10 holdings (61.9% of the fund): Berkshire Hathaway, TJX Companies, Fastenal, O’Reilly Automotive, Valeant Pharmaceuticals, MasterCard, Idexx Laboratories, Alphabet, Mohawk Industries and Rolls-Royce.

The fund did a bit of selling in the first quarter including closing four smaller positions and trimming larger positions including Valeant.

Since its inception on 7/15/1970 an investment in the Sequoia Fund (MUTF:SEQUX) has returned 13.63% annually versus 10.73% for the S&P 500.

The fund is noted for its long-term value investing style, portfolio concentration, and outperforming in down years. For more background on the fund you can check out my original article here.

The fund had another tough quarter due to its large position in Valeant Pharmaceuticals. To catch up on the ongoing saga you can find my 2015 third and fourth quarter updates here and here.

At the end of the year Valeant shares were still north of $100. That didn't last very long as the stock drifted lower right out of the gate. Then news of an S.E.C. investigation in late February sent prices into the $60's. The pain didn't stop there. In its mid-March earnings call Valeant cut 2016 revenue forecasts and said a delay in filing its annual report could pose a debt default risk. The stock plunged another 50% into the $30's. CEO Michael Pearson announced his resignation shortly thereafter. Valeant is now trading in the $25 to $30 range.

The losses from Valeant cost the Sequoia Fund over $1 billion in the quarter and total assets dropped nearly $1.3 billion. The Valeant position, which a few quarters ago was over 29% of the portfolio, is now just over 5%.

As a result of the Valeant debacle the Sequoia Fund has implemented position limits on the portfolio. Now its largest exposure can only be 20%.

On a side note here's an interesting article with some of the emails that went back and forth between Michael Pearson and Bill Ackman, who also owned Valeant in Pershing Square, as Valeant spiraled downward.

Usually by now the fund will have released commentary for the quarter. However, as of this writing none has been posted to its website.

Despite the big losses from Valeant the Sequoia Fund still beats the S&P 500 by a wide margin since its inception. That speaks to the power of long-term value investing.

Here's the activity for the first quarter:

New Stakes:

None

Stake Disposals:

Precision Castparts (BATS:PCP) manufactures and sells metal components worldwide, specializing in the aerospace, power generation, and industrial industries. The fund bought approximately 947,000 shares in 2009. The shares traded below $50 during parts of 2009 but ended the year over $100. The fund noted how PCP was able to improve operating margins during the recession. The fund did a minor trim (0.25%) in the third quarter of 2014. In the first quarter of 2015 the fund acquired another 257k shares, boosting its position by 27%. The shares started the year around $232 but quickly dropped to $186, a 52 week low, after poor third quarter results. The shares only spent one day below $200 and then traded between $200 and $220 for the rest of the quarter. The fund exited the position in the first quarter as Berkshire Hathaway closed its acquisition of Precision Castparts for $235 per share. A nice winner for the fund.

West Pharmaceutical Services (NYSE:WST) is a leading manufacturer of packaging components and delivery systems for injectable drugs and healthcare products. The fund took its initial stake in West Pharmaceutical in the second quarter of 2012 when the stock traded in the low 20's. It nearly doubled the position in the third quarter of 2013 with the stock trading in the high $30's. The fund was never a big position, less than 1% of the portfolio. It sold its position last quarter when prices traded between $55 and $65.

IMI plc (OTCQX:IMIAY) is a British based engineering company. Its products control the precise movement of fluids. The fund bought just over 4 million shares in the first quarter of 2012 with the price in the $28 - $29 range. This was another small position at less than 1% of the portfolio. It sold roughly 13% of the shares in 2014 with prices in the mid 50's. It sold the rest last quarter with prices back down in the $24 to $28 range.

IBM (NYSE:IBM) is an information technology product and services company. Its focus is on the cloud, data analytics, mobile, security and IT consulting. The fund bought just under 500 thousand shares in the second quarter of 2012 when IBM traded between $188 and $210. It sold the position last quarter when prices traded between $117 and $151. They couldn't have timed this trade any worse.

Admiral Group (OTCPK:AMIGY) is a car insurance company and sells its products in the US and Europe. This was a very tiny position in the portfolio, but a winner nonetheless. The fund bought in the second quarter of 2012 with prices in the $16 to $20 range and it sold out last quarter with prices in the $23 to $28.50 range.

Stake Increases:

Sirona Dental Systems (NASDAQ:SIRO) is the world's largest manufacturer of dental technology. It develops, manufactures and markets a complete line of dental products worldwide. Sirona was formerly part of Siemens and split off in 1997. Sirona recently merged with Dentsply International (NASDAQ:XRAY). It now trading as Dentsply Sirona under the XRAY ticker. Sirona shareholders received 1.8142 shares of Dentsply Sirona for each existing Sirona share. That account for most of the share increase during the quarter but the fund also added another 81 thousand shares. XRAY traded between $54 and $63.50 during that time.

Stake Decreases:

O'Reilly Automotive (NASDAQ:ORLY) is engaged in the retail of aftermarket automotive parts. The fund first established a position in 2004, buying almost 900,000 shares when prices ranged from $18.39 to $23.54. The fund increased the position to 1.7 million shares by the end of 2005. Prices ranged from $22.18 to $32.52 in 2005. The fund likes ORLY for its industry leading distribution network, experienced management, and consistent buybacks. Over the past quarter the fund decreased its position in ORLY by 0.25%. The fund holds 1.65 million shares for a 3.24% position in the portfolio. The fund cut the position by 33% in the first quarter, selling 559k shares. Prices ranged from $225 to $278.

Fastenal (NASDAQ:FAST) is a wholesaler and retailer of industrial and construction supplies. The fund has owned FAST since 2001 and likes the company for its long-term growth opportunities and great management. It's a stock the fund plans to hold despite lofty valuations. The fund held just over 4 million shares from 2005 through 2008, before selling about 15% during 2009. Since that time the fund more than doubled its position to over 6.9 million shares at the end of the second quarter of 2014. The fund made a major addition in the third quarter of 2014, adding nearly 1.8 million shares between prices of $43.74 and $50.08. The fund now owns 8.7 million shares. During the first quarter of 2016 the fund trimmed the position 26%, selling just over 2.3 million shares. The stock was volatile during that period and traded between $35 and $50.

Cabela's (NYSE:CAB) is a retail and direct outdoor goods company. The company operates 64 stores throughout the U.S. The fund likes the company's strong name recognition in the highly fragmented outdoor goods industry. Cabela's has its own financing unit and a strong rewards program. The fund thinks that gun sales have stabilized and Cabela's will return to its growth story. In the fourth quarter of 2014 the company bought 1.28 million shares for a 0.97% position in the portfolio. The stock traded between $46.60 and $59.72 during the quarter. During the first quarter of 2016 the fund sold 45% of its position, roughly 575k shares. The stock traded between $39 and $49.50.

Berkshire Hathaway (BRK.A & BRK.B), Expeditors International (NASDAQ:EXPD), Valeant Pharmaceuticals (NYSE:VRX), TJX Companies (NYSE:TJX), and Walmart (NYSE:WMT) saw minor decreases of 20% or less during the quarter.

Kept Steady:

Omnicom (NYSE:OMC), Rolls Royce (OTCPK:RYCEY), Compaignie Financiere Richemont SA (OTCPK:CFRUY), Constellation Software (OTCPK:CNSWF), Jacobs Engineering (NYSE:JEC), Canadian Natural Resources (NYSE:CNQ), Danaher (NYSE:DHR), EMCOR Group (NYSE:EME), Trimble Navigation (NASDAQ:TRMB), Mohawk Industries (NYSE:MHK), Perrigo Company (NYSE:PRGO), Zoetis (NYSE:ZTS), Praxair (NYSE:PX), MasterCard (NYSE:MA), Google (NASDAQ:GOOGL) and (NASDAQ:GOOG), Waters Corporation (NYSE:WAT), Hiscox Ltd. (OTC:HCXLY), Verisk Analytics (NASDAQ:VRSK), Costco Wholesale (NASDAQ:COST), Tiffany & Co. (NYSE:TIF), Croda International (OTCPK:COIHY), and Idexx Laboratories (NASDAQ:IDXX) saw no changes in the quarter.

Here's a snapshot of the activity from the first quarter of 2016:

SEQUX Q1 2016 Click to enlarge

Disclosure: I am/we are long GOOGL, WMT, CFRUY, OMC.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.