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Q&A with Investor Steven Romick of FPA Funds
Posted by: Holly LaFon (IP Logged)
Date: August 28, 2012 01:47PM

Top investor Steven Romick will join GuruFocus for an interview this month. You can ask him a question related to investing by leaving it as a comment below. GuruFocus will receive his answers via a phone interview in the next several weeks.

About Steve

Steven Romick is a managing partner at First Pacific Advisors, a firm he joined in 1996. He manages several portfolios, including the $9 billion FPA Crescent Fund. Romick has delivered a 125.6% cumulative return over the last ten years, compared to 34.9% for the S&P 500, and is in the top 1% of money managers.

The Crescent Fund has a long-short allocation, which is currently about 66.2% long and 3.4% short. About 46% of the fund is allocated in the U.S., 21.3% in Europe and 1.8% elsewhere.

Because of his belief in conservative positioning and capital preservation, Romick was able to dodge the worst of the market dips of recent decades. Presently, he has a cautious market outlook and just 69% exposure to risk assets.

Strategy

Romick is a bottom-up, absolute value investor with a long-term focus. Foremost, he lets price be his guide, “If a business or asset is good and cheap – absolutely, not relatively – we’ll buy it,” he says in his second-quarter letter.

However, Romick believes that investors ignore the macro picture at great peril. He has a tendency to be “appropriately fearful,” which has caused him to be early in evading disasters when he foresees them.

Outlook

The Crescent Fund returned 3.5% for the first half of 2012, with its biggest winners being Walmart (WMT), Petsmart (PETM) and Anheuser-Busch INB (BUD). Its biggest losers were Cisco (CSCO), Canadian Natural Resources (CNQ) and Western Digital (WDC). Cisco is just below their cost, and Western Digital gave up most of its gains in the second quarter. Canadian Natural Resources had operating issues in the first quarter, but a more general weakness in energy stocks dragged it down in the second quarter.

Romick has “a lot of fear” about the economy longer term. Reasons for this view include slowing U.S. GDP growth, the EU financial crisis, a housing bubble and unsustainable infrastructure spending in China, increased government spending and rising health care costs.

He believes the EU has reached a Keynesian end point when the government can no longer rely on deficit spending alone to spur the economy, and the U.S. is just the EU at an earlier stage.

Romick also believes that the U.S. stock market is priced above average, and valuation depends on sustaining all-time high operating margins. The margins have been helped by declining corporate tax rates, labor costs and interest rates – variables that are unlikely to decline in the future. “Without some significant improvement in demand, the ‘E’ part of the Price/Earnings equation may be overstated,” he says.

Current Holdings

Steve’s largest positions are CVS Caremark Corp. (CVS), Aon Plc (AON), Covidien Plc (COV), Microsoft (MSFT) and Walmart (WMT).

In the second quarter, he bought Oracle (ORCL), AIG (AIG), Bank of NY Mellon (BK), Aleghany Corp. (Y) and Xerox (XRX).

He is the only guru whose short positions GuruFocus tracks. See his stock portfolio here.

You can ask Steve your investing questions by typing them in the comments section below.




Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
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Rating: 3.0/5 (18 votes)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: GloryDaze (IP Logged)
Date: August 28, 2012 06:25PM

I'd be curious for his thoughts on position sizing, concentration and other portfolio construction matters.




Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 0.0/5 (0 votes)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: valueradar (IP Logged)
Date: August 29, 2012 01:00PM

1. How do you decide the relative ratio of longs and shorts in your portfolio?
2. Why are your shorting Verizon?
3. You like large caps such as WMT. The price of WMT has run up a lot. Do you think it is fair valued now? Do you still think that large cap will outperform?




Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 5.0/5 (1 vote)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: heisenman (IP Logged)
Date: August 29, 2012 04:31PM


What are your thoughts about "farmland" as an alternative asset play & the current valuation of US farmland. With farmland pricing near all time highs--- what are the pros and cons of owning this asset class in a diversified portfolio. Are there any publicly traded farmland investments, and if not would you
anticipate that Wall Street might package a REIT?



Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 5.0/5 (1 vote)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: vuasu (IP Logged)
Date: August 30, 2012 02:14AM

What percentage of your personal asset do you have in your own fund? Do you eat your own cooking?



Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 0.0/5 (0 votes)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: gurufocus (IP Logged)
Date: August 31, 2012 11:37AM

1. FPA seems to do a lot of research on Macro market. Why do you think macro market is important to bottom up value investors? At this point what worries you the most with macro picture?

2. How do you measure the absolute value of stocks?

3. What does your stock screener look like?

4. Do you like Bonds now? how do you measure the attractiveness of bonds?



Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 0.0/5 (0 votes)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: msiajoe (IP Logged)
Date: September 1, 2012 12:17AM

Do you consider other strategies apart from value approach?



Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 0.0/5 (0 votes)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: mihalikmike (IP Logged)
Date: September 1, 2012 02:43PM

Mr. Romick, Does HPQ look like a value trap or is it a good long buy? Thanks, Michael



Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 2.5/5 (2 votes)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: sandleking (IP Logged)
Date: September 4, 2012 08:53PM

Steve, a few questions
  • What is the inflection point for your opinion changing on Cisco? While Cisco is clearly cheap on an absolute basis, the economics of the company's business appear to have shifted against it and I am curious what is the case where you view this business shift as a selling point?
  • What was the worst individual stock mistake you made with the portfolio in the last 5 and 10 years? What was your thought process going into the investment and what was the turning point where you realized your thesis was mitaken?
Greatly appreciate the time you're taking.




Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 2.0/5 (1 vote)



Re Q A with Investor Steven Romick of FPA Funds
Posted by: jonmonsea (IP Logged)
Date: September 5, 2012 12:17AM

Would you talk about WMT sell point for you? What is your margin of safety with MSFT when the cash is factored out due to their propensity to make costly acquisitions and repatriation taxes? How fast could business sw2itch to Google's cloud software and if it is done as fast as you think it reasonably might be and tablets running non-MSFT software supplant laptops as quickly as is reasonably possible, and piracy remains an issue, does MSFT still have margin of safety?

What lead you to sell out VOD and ESV? Was it economics of business or better relative values, primarily? Does VOD still represent a good investment in your opinion? What makes CVS more moaty and cheaper than these companies? Why not own more BRK.A/B? Do you think individual investors are better off holding 30% cash at all times or 25% low-duration high-quality corporates/agencies and 5% cash at all times, if they are ready and willing to deploy this cash with a modicum of expertise into broadly diversified index funds in US, Europe, Japan, and BRICS?



Guru Discussed: Steven Romick: Current Portfolio, Stock Picks
Stocks Discussed: CVS, AON, WMT, CSCO, CNQ, WDC, PETM, COV, MSFT, AIG, BK, XRX,
Rate this post:

Rating: 1.0/5 (1 vote)



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