Former Fairholme Managers' New Fund Returning Double S&P

Early bets begin to pay off

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Oct 10, 2016
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The GoodHaven Fund (GOODX, Financial) surged back from a years-long stretch of underperformance with returns of more than double the S&P 500 this year as early bets on basic materials paid off along with the rebound in the sector.

Managing partners Larry Pitkowsky and Keith Trauner founded GoodHaven in 2011 following their departure from well-known investor Bruce Berkowitz (Trades, Portfolio)’s Fairholme Fund (Trades, Portfolio). Though they shun style categorizations, the founders follow principles of value investing pioneer Ben Graham and like their former colleague Berkowitz choose stocks priced at discounts to intrinsic value.

GoodHaven’s pursuit of discounted stocks has placed it out of tune with the market in recent years. Since its 2011 inception, it returned 3.70% versus the 11.51% of the S&P 500. When holdings suddenly appreciated this year, the value of GoodHaven’s portfolio soared by 19.20% versus 7.84% for the S&P 500 through Sept. 30, according to its website.

“We believe looking different is likely to be a material advantage for quite some time to come and, on average, the Fund owns securities that seem materially cheaper than indexes on common valuation metrics,” GoodHaven said its May semi-annual report.

The portfolio’s top two positions as of June 30, Barrick Gold Corp. (ABX, Financial) and WPX Energy (WPX, Financial), have driven year-to-date performance. Canada-based Barrick, the biggest gold mining coming in the world, advanced 113.96%, as WPX Energy, a petroleum and gas exploration company in Oklahoma, gained 121.60%.

Barrick’s upswing followed its 10-year nadir of September last year and reflected changes to its business as well as improvement in the price of metals. In August, Barrick created a position of chief investment officer to oversee all of its capital allocation decisions. It has also improved its balance sheet by paying down $968 million in debt of its $2 billion target and lowered operating costs, which have been helped by cheap fuel.

Operational changes influenced a second-quarter return to profit for the first time since the first quarter 2015, with $138 million in earnings and 12 cents in EPS, compared to a $9 million loss and a 1 cent loss per share in the prior-year quarter. Central to its financial plans is increasing free cash flow, which was positive for the fifth quarter in a row.

Barrick’s revenue also increased to $2.01 billion from $1.93 billion the previous quarter and compared to $2.23 billion in the same quarter the prior year.

The Barrick position made up 20.25% of GoodHaven’s portfolio as of second quarter-end. Valued at $58.99 million, they owned 2,763,1845 shares.

WPX Energy, a $4.20 billion market cap company, operates oil positions in North Dakota’s Williston Basin and San Juan basin, and is a newcomer to the Permian basin in the Southwest. Its peers include CONSOL Energy (CNX, Financial) and Whiting Petroleum (WLL, Financial).

WPX’s stock crashed along with the price of oil through 2015, dipping to as low as $2.53 per share in January before changing course. On Monday, shares closed at $12.79, though they remained at more than half of their August 2014 five-year peak near $27.

GoodHaven attributed WPX’s resurgence only in part to increases in commodity prices but also to capital allocation changes. For the future, the company has declared ambitious growth targets bolstered by a revision of its previous assessment in 2015 and new second-quarter acreage purchases. Primarily, it has doubled its projected oil potential in the Permian to 2.4 billion barrels per day from 1.1 billion barrels per day, reflecting growth from 25,000 barrels per day in 2013 to 100,000 barrels per day by 2020, estimating up drillable locations to 5,500 from 3,600.

Despite the overwhelmingly positive returns the basic materials stocks brought to date this year, GoodHaven stressed that they were “not simple or binary commodity bets” and expected their large and valuable asset bases and governance changes to lead to improved financial results, which they said earlier this year “now appears to be well underway.”

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