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Q&A with Investor Steven Romick of FPA Funds

Holly LaFon

Holly LaFon

249 followers
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.


Rating: 3.0/5 (18 votes)

Comments

GloryDaze
GloryDaze premium member - 1 year ago
I'd be curious for his thoughts on position sizing, concentration and other portfolio construction matters.

valueradar
Valueradar - 1 year ago
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?

heisenman
Heisenman premium member - 1 year ago


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?
vuasu
Vuasu - 1 year ago
What percentage of your personal asset do you have in your own fund? Do you eat your own cooking?
gurufocus
Gurufocus premium member - 1 year ago
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?

msiajoe
Msiajoe - 1 year ago
Do you consider other strategies apart from value approach?

mihalikmike
Mihalikmike - 1 year ago
Mr. Romick, Does HPQ look like a value trap or is it a good long buy? Thanks, Michael
sandleking
Sandleking - 1 year ago
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.

jonmonsea
Jonmonsea premium member - 1 year ago
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?
shb600
Shb600 premium member - 1 year ago
What do you think of WAG takeover of Alliance Boots? Seems like a very high price. Do you like the deal? What level would be a good value buy for S&P500?
trogg1
Trogg1 - 1 year ago
I'm a 63 year old, single male. I receive a pension of about $4K per month and about $1200 of social security per month. My assets total about $800K not including the home I own. No outstanding loans. Do I need an annuity?
joe_litehorse
Joe_litehorse - 1 year ago
How do you assess the Balance Sheet? P&L? Cash Flow? It seems as though the markets are driven by quarterly earnings, and analysts outlooks and not enough on net tangible assets (excluding goodwill). Your insights will be most appreciated.
mohmand
Mohmand - 1 year ago
Given your background and how you entered into the value investing field, what would you do different if you had to do it again? What advice do you have for new graduates wanting to enter the field, do you recommend the traditional IB path?

What is your thesis behind BK? When evaluating a company in an absolute sense, which type of vaulations do you look at (Deal Comps, DCF, etc.?)

george murillo
George murillo - 1 year ago
On a pro rata distribution given out by a company recently, I wondered why they would give it out as cash instead of a stock issuance? The distribution was probably due to a large earnings pop because the company sold off some assets late last year. The distribution shows up in stock quotes as a 58% dividend which sounds too good to be true. So why pass on tax liabilities to the shareholders is what I am wondering?
w1omega
W1omega - 1 year ago
I read Bob Rodriguez's "Caution: Danger Ahead" and I'm scared too. How do you distinguish value from value-trap? Is that more of an art, or is there a matrix you can look up?

How do you determine if a company's profit margins are protected from compression or not?

Have looked into what multiple equity sells for in severe recession or depression?
yuancharlie
Yuancharlie - 1 year ago
Steve:

Would you consider Walgreens a good buy at current prices ? How would you compare them to CVS Caremark which you favor more ? Are there competitive advantages you see at CVS over Walgreens ? Thanks.
CNG
CNG - 1 year ago
Steve:

I know that there is a growing interest in Methanol, made from Natural Gas, as a vehicle fuel. This low cost, low pollution fuel could be used directly in the 11 million E85 (Ethanol) vehicles that are already on the road. What companies would benefit if this process takes hold?
w1omega
W1omega - 1 year ago
How would you analyze a company like Sears that owns what might be considered "prime real estate" at the malls that has recorded these properties at historical cost on the books? Can Sears or other companies like it find a way to monetize ownership of these properties?
yacksterby
Yacksterby premium member - 1 year ago
Steven:

Thanks for accepting to hear and answer our questions - congratulations on a fantastic long term record.

I'm curious what you see in Covidien - it seems there are other more attractive medical device companies out there...mind sharing what I might be missing?

Also, given the latest developments on AON with them falling short on some of their goals with the Hewitt acquisition, how has this changed your valuation/expectations?

Finally, I hear there's a connection between you and the song "Route 66"...care to share? :)

Thanks again for your time!
dana-guru
Dana-guru - 1 year ago
Do you think MGIC Investment Corp (NYSE: MTG) will survive? and possibly make a come-back to $4 - $5 levels ?

Anticipated thanks!
rgrusky
Rgrusky premium member - 1 year ago
Has FPA altered its long term/intermediate term view on future oil prices. Specifically, has the shale oil production in North America fundamentally altered the global supply growth dynamic? If so, do you think the new trend line, over time, is flat to down? If not, why not? How does this impact your thinking on the intrinsic value of CNQ and OXY? Thank you.

mps
Mps premium member - 1 year ago
1. In the last twelve months you have been adding some exposure to banks and insurance companies, are you still finding attractive opportunities in those areas?

2. How do you view the current opportunity set in the mutual thrift conversion space?

3. What advice do you have for a young value investor getting started in the investment management business?

Thank you.

Please leave your comment:


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