Oceanstone New Picks From A Reclusive Master

by: Safety In Value

The Oceanstone Fund (MUTF:OSFDX) is a mutual fund, and what a mutual fund it is. Morningstar has its 5 year return at 48 percent per year. Not 48 percent over 5 years, but an average of 48 percent per year for 5 years in a row. That's dramatically better than the benchmark returns, even accounting for 2013 being an excellent year in the markets.

This article will update my previous article on Oceanstone with new information from their September 30th, 2013 regulatory filing of their holdings. My previous article profiled the three largest holdings of the fund as of this summer. Their largest positions at that time were in ITT Tech (NYSE:ESI), Rite-Aid (NYSE:RAD) and Triple-S Management (NYSE:GTS). As of the September 30th, 2013 date of the aforementioned filing, the manager has maintained his positions in ESI and RAD, but has sold the position in GTS.

The manager's name is James Wang, and he is famously reclusive. The fund beat the market by a massive amount during the 2008-2009 downturn, and has been able to keep up with the market since then with a huge cash component. This has reduced the market risk of the fund substantially, as cash will not decline in value if the market goes down again.

The ESI position has appreciated substantially since it was originally purchased, but is still objectively cheap on an earnings and revenue basis. However, the company still has risks, as do most cheap stocks. They recently received a letter from the CFPB. The letter is a notice of opportunity to respond and advice, giving ITT a chance to respond before any formal action is taken. While this is an administrative step, it does indicate the likelihood of action is higher. Another Seeking Alpha article identified it as a stock with significant insider selling, and a there has been consistently high short interest, with over 30% of the float sold short.

ESI was the fund's largest position, and is a three bagger from its 52 week low earlier this year. RAD is also a three bagger this year, and its performance has continued to be strong. Seeking Alpha writer Equity Watch recently published an article on Rite-Aid suggesting it is undervalued and should have positive operational performance going forward.

The RAD and ESI positions are both greater than 10% of the fund, but Oceanstone also has 3 smaller positions. Gain Capital (NYSE:GCAP) is a currency broker that is a double from its 52 week low (a common condition for stocks Oceanstone has owned). Rocky Brands (NASDAQ:RCKY) is a footwear company that sells work boots. The company trades at a low valuation, and has recently initiated a dividend. The final position is in Xinyuan Real Estate (NYSE:XIN) a Chinese real estate developer. The company did an IPO on the New York Stock Exchange as opposed to the more common reverse merger, and sold convertible notes for 20% of the company to the Texas Pacific Group. This makes it unlikely the company is a fraud, but the market is still deeply suspicious of anything to do with China.

Oceanstone is a fund that has significantly outperformed. That makes all its positions worthy of further investigation. The fund could also be a wise investment for those who want to trust a successful manager to manage their money directly.

Disclosure: I am long ESI, GTS, . 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.