Romick discussed in his second quarter letter how he viewed the market as artificially inflated due to quantitative easing, and not as a natural result of improving earnings among businesses. In fact, for the first half of the year, GAAP earnings for the S&P 500 declined one half of one percent compared to the comparable period last year. FactSet research also indicated that 80% of corporate EPS guidance for the second quarter was negative. Romick wrote:
“Based on the recent comments by Fed Chairman Ben Bernanke regarding tapering the Fed’s policy of quantitative easing and the market’s negative reaction to those comments, it is clear to us that market fundamentals such as earnings growth, returns on invested capital, expanding profit margins, and revenue growth are taking a backseat to speculation about Fed policy. This situation, in our opinion, is risky for investors because valuation metrics are largely being ignored, and history generally is not on the side of those who ignore valuations for too long. Perhaps we are old-school, but we firmly believe profit growth and valuations are the long-term determinants of stock prices.”
During the third quarter, Romick added the most to the following holdings of the FPA Crescent Fund: Occidental Petroleum Corp. (OXY), Microsoft Corp. (MSFT) and Oracle Corp. (ORCL).
Occidental Petroleum Corp. (OXY)
Romick has been an avid buyer of Occidental Petroleum, adding more shares in almost every quarter since starting his position in the first quarter of 2010. However, in the third quarter this year he made his largest purchase yet, buying 950,600 shares at an average price of $90. His total investment in the company stands at 3,616,500 shares, composing 4.9% of his portfolio.
Occidental Petroleum shares moved up 26% year to date to around $96.44, near a two-year high.
It is an international oil and gas exploration and production company.
The company has been increasing its revenue per share at a rate of 4.9% annually and its EBITDA per share at a rate of 2.9% annually for the past five years. It also has generated more than $1 billion free cash flow annually since 2007 and has balance-sheet cash of $8.3 billion, with long-term liabilities and debt of $17.4 billion.
OXY’s second quarter included net income of $1.3 billion, or $1.64 per diluted share, flat over the previous year. Net sales increased to $5.96 billion from $5.77 billion, though it was down for the first six months of the year to $11.8 billion from $12 billion the previous year. Production increased by 6,000 barrels over the previous-year quarter, mitigated by Columbian insurgency, severe West Texas storms and planned turnarounds in the Permian.
The 10-year revenue and earnings history of OXY:
It has a P/E of 17.7, P/B of 1.9 and P/S of 3.2, which is close to a two-year high.
Microsoft Corp. (MSFT)
Romick has also been an aggressive buyer of Microsoft. He purchased shares in the majority of quarters since establishing the position in the third quarter of 2010. Again, the third quarter of 2013 saw his greatest buying yet, with 3,298,700 shares added at an average price of $33. He owns 15,013,700 shares total as of the quarter’s end, composing 7.2% of his portfolio.
Microsoft shares rose almost 30% year to date, priced around $34.64 Monday, which is near a 10-year high.
The company has grown revenue per share at an average rate of 9.7% annually, and EBITDA per share at a rate of 7% annually over the past five years. Book value per share increased at a 21.2% rate over the same period. Microsoft has a cash balance around $94.5 billion, with long-term liabilities and debt around $26.1 billion.
In the second quarter Microsoft reported $19.9 billion in revenue, up from $18.1 billion the previous year. Net income was $4.97 billion, up from a net loss of $492 million the previous year. While the company’s PC business declined, it continued to see growth in its enterprise and cloud business, giving it a record unearned revenue balance for the quarter.
Microsoft’s 10-year revenue and earnings history:
The company has a P/E of 13.5, P/B of 36 and P/S of 3.75, close to a three-year high.
Oracle Corp. (ORCL)
Romick initiated his stake in Oracle in the second quarter of 2012 and added to it each quarter since. The third quarter saw him make his third-largest purchase yet, with 1.745 million new shares added at an average price of $32 per share. His total holding stands at 10.575 million shares at quarter-end, or 5.1% of his portfolio.
Oracle shares declined almost 1% this year, priced around $33.02 Wednesday, near a 10-year high.
A cloud and data center software and hardware company, Oracle has grown revenue per share at a rate of 14.9% annually and EBITDA per share at a rate of 187.1% annually for the past five years. Free cash flow per share also increased at 18.4% and book value per share at 17.6% rates during the same period.
The company has balance-sheet cash around $42.6 billion and long-term liabilities and debt around $28.3 billion.
In its company’s fiscal first quarter 2014, Oracle reported GAAP revenues were up 2% year over year to $8.4 billion. GAAP net income was up 8% to $2.2 billion. Oracle also had record first-quarter free cash flow of over $6 billion, of which it used $3 billion to repurchase shares in the quarter.
Oracle revenue and earnings history over 10 years:
Oracle has a P/E of 14.2, near a 10-year low. It has a P/B of 3.5 and P/S of 4.26, close to a two-year high.
To see more Steven Romick stocks, go to his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Steven Romick.
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