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Steven Romick Is 25% Cash and Buys Only Google, Interpublic Group and Bank of America

April 16, 2012 | About:
Holly LaFon

Holly LaFon

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Steven Romick, CFA of FPA Crescent Fund, a Los Angeles, Calif.-based firm with $19.3 billion assets under management and where fundamentals are paramount, hasn’t been excited about valuations lately. But he told Bloomberg in March that he would prefer owning stocks than sitting on a lot of cash when he believes inflation is likely coming.

The first-quarter positioning of his portfolio is 64.29% long common stock, -3.24% short common stock, 0.73% limited partnerships, 0.12% derivatives/futures, 0.21% preferred stock and convertible bonds, 2.88% total corporate bonds, -0.8% short bonds and notes, 1.67% mortgage backed securities, 9% total U.S. government and agency securities, and 24.63% cash and equivalents.

The Crescent Fund returned 3% in 2011, compared to 2.1% for the S&P 500 and 1.0% for the Russell 3000. In the last five years, his fund had a cumulative gain of 25.6%, compared to a loss of 3% for the S&P 500.

His largest add to an existing holding in the first quarter of 2012 was Wellpoint Inc. (WLP), of which he bought 955,000 shares at $63 each. He has started out 2012 with three new stocks: Google (GOOG), Interpublic Group (IPG) and Bank of America (BAC).

Romick’s largest new purchase in the first quarter was Google (GOOG). He bought 105,200 shares of the Internet search company at an average price of $577.79. The holding now accounts for 1.3% of his portfolio.

Romick added Google to one of his other funds in the second half of 2011, and explained his position in detail in his fourth quarter letter. In his own words:

In the second half of the year, Crescent established new positions in a few companies that have more such global footprints. We initiated investments in Google (GOOG), as well as the advertising agencies Interpublic (IPG) and WPP (WPP). The fortunes of all three are tied directly to the level of global advertising spend, and they all saw their shares prices decline due to concerns of a recession-related slowdown. At our purchase price, we believe we were buying each at roughly 11-13x our estimated earnings for 2012 should the fears of a macroeconomic slowdown prove correct. This strikes us as a very reasonable multiple to pay for asset-light global businesses that generate strong free cash flow across the business cycle and have the capability to grow earnings greater than GDP in a normal economic environment.

Of the three, we expect Google to grow revenue the fastest, IPG to demonstrate the greatest improvement in operating margins, and WPP to fall in the middle on each measure. Regardless, at the prices we paid, the market was according little progress to any of these prospects, and that allowed us to purchase each position at a price that provided an attractive margin of safety in all but the most pessimistic of outcomes. Should the valuations of any of these names retrace over the coming year we would expect to accumulate on weakness and increase our position sizes. In fact, at the right price, we would very much like to see this collection of companies account for a demonstrably greater exposure than where the weighting currently stands.

We continue to focus our long equity book on larger, higher-quality businesses that trade at reasonable valuations and that have great balance sheets, as well as attractive dividend yields (when possible). The portfolio characteristics listed below reflect the current direction, with a weighted average P/E, Price/Book, and Debt/Capital at less than our historic average, while the fund’s Market Capitalization, Return on Equity and Dividend Yield are above average.


Romick’s second-largest pick, Interpublic Group (IPG), is a global marketing communications and marketing services company. He bought 4,421,800 shares in the first quarter at an average price of 10.35, making it 0.96% of his portfolio.

When Romick bought Interpublic, its stock had dipped considerably in the third quarter, and had been going back up slightly in the fourth and first quarters.

The company also issued its full-year and fourth-quarter 2011 earnings release in the first quarter on February 24. Its revenue increased 6.1%, with organic revenue growth at all of its major agency networks, for the year and 2.8% for the full quarter. Earnings per share increased 62% to $0.99 per share in full-year 2011, compared to 2010. In 2011 it also returned over $500 million to shareholders. In its full-year 2011 release it announced a $300 million share repurchase program and a continuation of its dividend.

Part of IPG’s 2011 earnings per share boost came from the company cashing in on a lucrative investment in the third quarter. The company had purchased an almost $5 million stake in Facebook in 2006, and sold half of it in August 2011 for $133 million. Interpublic still has a .02% stake in Facebook.

IPG also had an attractive P/E ratio drop in the first quarter:

IPG pe,ps,pb Interactive Chart



Romick also bought the beleaguered bank that Donald Yacktman bought in the fourth quarter, and Ray Dalio, Bruce Berkowitz and many other gurus have large holdings of (see Bruce Berkowitz’s case studies on it here). Romick bought 2,940,000 shares of Bank of America in the first quarter at an average price of $7.34, which makes it 0.54% of his portfolio.

Financials have gone from 1.3% of Romick’s portfolio at mid-2011 to 12.3% at the end of the first quarter. According to his second-quarter letter, he looks for banks that have a: strong operating franchise, significant market share, exposure to the global financial system, much stronger capital position than during 2006-07, robust reported capital strength (based on traditional measures), unusually low price to current tangible book value, low valuation to prospective normalized earnings power.

Bank of America’s stock was also trending upward coming off of a third- and fourth-quarter dip when Romick bought it. Year to date it has increased 58%.

In his 2011 letter to shareholders, Bank of America CEO Brian T. Moynihan acknowledges the challenges weighing on the bank’s stock price: concerns about the global economy, a sustained period of near-record low interest rates, the implementation of new regulations and capital requirements, and the time it will take to resolve mortgage issues. The bank’s revenue, net of interest expense, on an FTE basis declined 15% to $94.4 billion in 2011, largely due to increased reserves for mortgage related matters.

To see Steven Romick’s new adds, reductions and sells, go to his updated portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Steven Romick.


Rating: 3.9/5 (14 votes)

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