Tracking The Hotchkis & Wiley Value Opportunities Fund - Q3 2014 Update

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Includes: AIG, BAC, C, DIISY, DNIYY, DOOR, HWAAX, HWACX, HWAIX, JPM, MSFT, NPEGF, ORCL, RSNAY
by: V is for Value

Summary

Total net assets increased 9.3%, from $483 million to $527 million. Total positions increased from 49 to 53.

Top 10 holdings (50.4% of the fund): AIG, DOOR, BAC, C, JPM, ORCL, DNIYY, NPEGF, RSNAY, and MSFT.

The fund increased top 10 positions AIG, DOOR, ORCL and DNIYY by over 20%. The fund reduced last quarter’s top position, Direct Line Insurance Group, by 87%.

Since its inception on 12/31/02 the Hotchkis & Wiley Value Opportunities Fund (MUTF:HWAAX) has returned 13.77% versus 9.32% for the S&P 500. This fund has class A, C and I shares.

The fund seeks capital appreciation through a disciplined, value-oriented approach. It looks for companies with sustainable cash flow and improving business performance. It typically holds 40 to 50 positions. The portfolio is highly concentrated with the top 10 positions typically accounting for 50% of the portfolio.

In the third quarter commentary, the fund said that the S&P 500 hitting new highs recently is different from 1999 and 2007. This time it's supported by strong corporate earnings and an improving economic environment. They go on to say an improved housing market and improving unemployment picture will drive consumer spending.

Regarding the top position from last quarter, insurer Direct Line Insurance Group (OTCPK:DIISY), the fund stated the stock was up over 30% since the beginning of the year and it was time to take profits. It sold 87% of the position over the quarter. It put some of the proceeds into RSA Insurance, which trading at less than 10x normal earnings and 1.3 book value, it feels is attractively valued.

Here's the significant activity for the third quarter.

New Stakes:

Honda Motors (NYSE:HMC): Honda Motors is a Japanese auto and motorcycle manufacturer. HMC is off 27% since reaching a high of $42.50 in November 2013. The fund bought 152k shares over the third quarter for a 1.0% position. Prices ranged from $33.69 to $36.02. HMC has since declined to the $31 to $32 range, an area of major support in 2012.

Helen of Troy (NASDAQ:HELE): Helen of Troy is a consumer goods company that manufactures and sells personal care products, housewares and accessories, and healthcare products. From the beginning of 2013 through the first quarter of 2014 the stock doubled from $35 to $70. It hit a low of $52 in September and October. The fund acquired 73k shares for a 0.73% position. Prices ranged from $52.52 to $62.40. The stock is currently trading over $65.

TRI Pointe Homes (NYSE:TPH): TRI Pointe Homes is a US homebuilder. It was acquired by Weyerhaeuser Real Estate in a reverse merger in July. It owns land inventory of 31,000 lots, including 19,000 lots in entitlement-constrained California. The fund acquired 92k shares for a small 0.23% position. Prices ranged from $13.50 to $17.00.

Thorntons PLC (OTC:THTPF): Thorntons PLC is a chocolatier out of the UK. It has 246 shops and 186 franchisees, as well as a mail and internet business. The fund acquired $81k worth of stock for a tiny 0.02% position.

Citizens Financial Group (NYSE:CFG): Citizens Financial Group is a bank operating out of Pennsylvania. The company was formerly a subsidiary of the Royal Bank of Scotland. The new ticker started trading in late September. The fund acquired 409k shares for a 1.82% position. Prices ranged from $21.50 to $23.50. CFG is the largest bank IPO since Goldman Sachs.

RSA Insurance Group (OTCPK:RSNAY): RSA Insurance Group is a commercial insurer out of the UK. The fund sold a lot of its Direct Line Insurance Group position and put some of the proceeds into RSA. The fund acquired over 1.9 million shares in the third quarter for a 2.87% position. That makes it the ninth largest position in the fund. Prices ranged from $7.24 to $8.32.

Dragerwerk Ag Prd Sh (OTC:DRWKF): This is an interesting company out of Germany. It makes breathing and protection equipment, gas detection and analysis systems, and noninvasive monitoring technologies. The fund acquired 90k shares for a 1.51% position. Prices ranged from 65.17 to 80.28 on the German exchange.

GlaxoSmithKline (NYSE:GSK): GlaskoSmithKline is a drug manufacturing and health care product conglomerate out of the UK. The company currently sports a hefty 5.3% dividend. The fund acquired 204k shares over the third quarter for a 1.78% position. Prices ranged from $45.97 to $54.52.

BAE Systems (OTCPK:BAESY): BAE Systems is the British multinational defense, security, and aerospace company. The fund acquired a little over 1.2 million shares for a 1.78% position in the portfolio. Prices ranged from $28.50 to $31.00.

Stake Disposals:

McDonald's (NYSE:MCD): McDonald's is the hamburger restaurant chain with over 35k locations. The fund took a small 0.45% position in MCD in the second quarter, but then turned around and sold out in the third quarter.

Philip Morris (NYSE:PM): Philip Morris is a cigarette manufacturer and the international part of the old Altria. The fund started acquiring the stock in the second quarter of 2013 and built up a 1.84% position by the end of the first quarter 2014. The fund cut the position 22% in the second quarter and sold the rest in the third quarter when prices ranged from $81.50 to $86.50.

Wells Fargo (NYSE:WFC): Wells Fargo is one of the big four money center banks in the US. The fund started accumulating WFC in the last quarter of 2012, buying 110k shares. WFC traded between $23 and $37 at the time. The fund steadily accumulated through the first quarter of 2014 and owned 398k shares for a 4.69% stake in the portfolio. The fund sold off 169k shares, or 42.5% of its position in the second quarter. Prices ranged from $49 to $53. It sold its remaining 229k shares in the third quarter when prices ranged from $49.50 and $53.75. It's interesting that the fund has closed its WFC position, while adding to Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM).

Capital One Financial (NYSE:COF): Capital One Financial is a credit card and consumer & commercial banking company. The fund first established a position in the third quarter of 2013 and build a 69k position by the first quarter of 2014, or 1.27% of the portfolio. Prices ranged from $64 to $70. The fund closed out of the position last quarter when prices ranged from $78 to $85.

NRG Energy (NYSE:NRG): NRG Energy is the owner of multiple power generation facilities and provides energy services. The fund first established a position in the first quarter of 2012. It acquired a 55k position when prices ranged from $16 to $18. The fund built the position up to 99k shares, but it was always a small position, less than 1% of the portfolio. The fund sold out this past quarter with prices between $29 and $36.

Stake Increases:

American International Group (NYSE:AIG): The fund started buying AIG in the first quarter of 2012, acquiring 133k shares. By the end of 2012, the fund had 420k shares and it was the largest position on the portfolio. Prices fluctuated between $23 and $37 during 2012. The fund continued to accumulate over 2013 and 2014 and owned 788k shares as of the second quarter. In the third quarter, the fund bought another 388k shares when prices ranged from $52 to $56. The fund now owns over 1.1 million shares and it's the biggest position on the portfolio by far, making up 11.72%.

Masonite International (NYSE:DOOR): Masonite International is a US interior and exterior door manufacturer. The company went private in 2005 and then went bankrupt and reorganized in 2009. Shares started trading again in the third quarter of 2013. The fund acquired 426k shares by the end of 2013 for the third largest position in its portfolio. Prices in 2013 generally ranged from $46 to $52 before rallying to $59 by the end of the year. The fund added about 5% each of the first and second quarters of 2014. In the third quarter, the fund boosted the position by 30% to 626k shares. Prices ranged from $48 to $59. DOOR is now the second largest position and makes up 6.57% of the portfolio.

Danieli (OTCPK:DNIYY): Danieli & C. Meccaniche is an Italy based industrial company. It designs and manufactures machines and plants for the metallurgic industry. The fund started acquiring Danieli in the second quarter of 2013 when prices on the OTC ranged from $15 to $18. In the second quarter, the fund boosted the position 23.1%, adding 121k shares for a total of 643k. The fund continued buying in the third quarter, boosting the position by 47% to 945k shares. Prices ranged from $19 to $23. The position now accounts for 3.41% of the portfolio and is the seventh largest position in the portfolio.

Oracle (NYSE:ORCL): Oracle is a database software and hardware company. The fund established its position in the second quarter of 2013, acquiring 251k shares when prices ranged from $30 to $35. By the end of 2013, the fund owned 326k shares. The fund continues to buy in 2014, boosting the position by 15% in the first quarter, 9% in the second quarter, and by 50% last quarter. Prices in the third quarter ranged from $38 to $42. The fund now owns 628k shares for a 4.56% stake in the portfolio, its sixth largest position.

The fund added over 20% to the following positions in the third quarter: Motors Liquidation (OTC:MTLQU), Cairn Energy (OTCPK:CRNCY), Cobalt International Energy (NYSE:CIE), Kosmos Energy (NYSE:KOS), Rockhopper Exploration (OTCPK:RCKHF), Sanofi (NYSE:SNY), Royal Mail (OTCPK:ROYMY), Meritor (NYSE:MTOR), and Great Plains Energy (NYSE:GXP). These are smaller positions in the portfolio.

The fund added less than 20% to the following positions in the third quarter: BAC, C, JPM, KSB AG (OTC:KSBBF), and Nippon Electric (OTCPK:NPEGF). BAC, C, and JPM are top 10 positions.

Stake Decreases:

Direct Line Insurance Group (OTCPK:DIISY): Direct Line Insurance Group is a commercial insurer out of the UK. The fund started buying in the first quarter of 2013 when prices traded around 200 pence on the UK exchange. It was the largest position at the end of the second quarter 2014. Last quarter, the fund dumped 88% of its position with prices around 300 pence on the UK exchange. The fund put some of the proceeds into a new insurer, RSA Insurance.

The fund decreased the following positions by over 20% in the third quarter: Bayerische Motoren (BAMXY), Lakes Entertainment (LACO), Rent-A-Center (NASDAQ:RCII), Royal Dutch Shell (NYSE:RDS.B), Taro Pharmaceutical (NYSE:TARO) and Con-Way (NYSE:CNW). TARO and CNW were decent sized positions, but not in the top ten. These are all small positions in the portfolio now.

The fund decreased the following positions by less than 20% in the third quarter: Staples (NASDAQ:SPLS), Corning (NYSE:GLW), Microsoft (NASDAQ:MSFT), Hewlett-Packard (NYSE:HPQ), and Noranda Aluminum (NOR). MSFT's reduction was small enough that it moved into the top ten positions, while GLW fell out of the top ten.

Kept Steady:

Wal-Mart (NYSE:WMT): Wal-Mart is a worldwide retail store operator. The fund first established a position in the first quarter of 2013, owning 117k shares by the end of the year. The position has held steady since then. Nearly the whole time WMT ranged between $72 and $80. It has broken out recently, a beneficiary of the stronger dollar and lower gas prices. The stock currently trades around $88.

General Motors (NYSE:GM), Target (NYSE:TGT), Sonic Automotive (NYSE:SAH), Global Indemnity (NASDAQ:GBLI), GEO Group (NYSE:GEO), Express Scripts (NASDAQ:ESRX), UnitedHealth (NYSE:UNH), Air T (NASDAQ:AIRT), Miller Industries (NYSE:MLR), Hudson Global (NASDAQ:HSON), Kaiser Aluminum (NASDAQ:KALU), and Mobistar (OTC:MBSRY) maintained the same share positions from the second to third quarter.

HWAAX Q3 2014

Disclosure: The author is long MSFT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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