Bob Rodriguez's Former Fund Urges Caution, Keeps Buying 4 Stocks

FPA Capital Fund fills portfolio with substantially discounted stocks

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Jan 12, 2017
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First Pacific Advisers’ FPA Capital Fund (Trades, Portfolio) has operated without legendary stock-fund manager Robert Rodriguez, its former manager, since 2009.

Rodriguez stepped down from the fund after returning 15 percent annually over 25 years, from 1984 to 2009, during which time FPA Capital ranked as the best performing diversified U.S. stock fund. In 2010, Rodriguez took a one-year sabbatical and resumed his roles as managing partner and portfolio manager on his return in 2011, but retired on Dec. 16. Rodriguez centered his strategy on finding undervalued, out-of-favor stocks and holding substantial cash when he found nothing he wanted to buy.

The subsequent managers, Arik Ahitov and Dennis Bryan, missed out on some of the market’s gains over recent years. They lost 1.14% on average annually for the past three years ended Sept. 30, as positions in for-profit education companies and energy stalled.

The fund came back in the third quarter, returning 10.2% to bring it to 12.28% for the year to date. Returns were juiced by an uptick in oil prices, which managers compared to “green shoots from seeds we planted a while ago beginning to blossom.” It saw the most appreciation in its technology stocks, like Arris International (ARRS, Financial), InterDigital (IDCC, Financial) and Western Digital (WDC, Financial).

Citing negative interest rates, weak GDP growth, extreme valuations and an expensive market, the fund maintained a 27.6% cash position and managers said that they “urge extreme caution.”

“As we near the 8th year of the current bull market, it can be tempting to forget that nasty downturns happen with some regularity, and there is never a bell rung to announce their arrival. We continue to be on high alert,” they wrote in their third-quarter letter. “Our portfolio is filled with companies trading at substantial discount to market multiples (and, more importantly, at discounts to our intrinsic value estimates).”

On Wednesday, FPA Capital Fund (Trades, Portfolio) revealed that in the fourth quarter it cut back on for-profit education companies that had hurt returns. Managers reduced Apollo Education (APOL, Financial) by 82.4%, accepting an approximate 31% loss, and trimmed 27.1% of their position in DeVry Education Group (DV, Financial) as shares drifted up after falling to as much as half their estimated buying price.

The fund avoided buying new stocks in the fourth quarter and added to only four existing holdings: Babcock & Wilcox Enterprises (BW, Financial), Avnet Inc. (AVT, Financial), Houghton Mifflin Harcourt Co. (HMHC, Financial) and Aaron’s Inc. (AAN, Financial).

Aaron’s Inc. (AAN, Financial)

FPA Capital Fund (Trades, Portfolio) added 7,050 shares to its stake in Aaron’s. At quarter-end, it had 1,190,009 shares of Aaron’s, a 0.50% increase. The stock represents 7.3% of the portfolio and had an average quarterly price of $28.

Aaron's Inc. has a market cap of $2.32 billion; its shares closed at $32.50 with a P/E ratio of 16.97 and P/S ratio of 0.71. The trailing 12-month dividend yield of Aaron's Inc. stocks is 0.33%. The forward dividend yield of Aaron's Inc. stock is 0.34%. Aaron's Inc. had an annual average earnings growth of 12.3% over the past 10 years. GuruFocus rated Aaron's Inc. the business predictability rank of 4.5-star.

Houghton Mifflin Harcourt Co. (HMHC, Financial)

FPA Capital Fund (Trades, Portfolio) added 129,850 shares to its stake in Houghton Mifflin Harcourt. At quarter-end, it had 1,433,507 shares, a 9.96% increase. The stock represents 2.98% of the portfolio and had an average quarterly share price of $12.

Houghton Mifflin Harcourt Co. has a market cap of $1.39 billion; its shares closed at $11.30 with and P/S ratio of 0.94.

Avnet Inc. (AVT, Financial)

FPA Capital Fund (Trades, Portfolio) added 100,040 shares of Avnet. At quarter-end, it had 867,520 shares, a 13.03% increase. The stock represents 7.92% of the portfolio and had an average quarterly share price of $45.

Avnet Inc. has a market cap of $5.99 billion; its shares closed at $46.95 with a P/E ratio of 13.89 and P/S ratio of 0.27. The trailing 12-month dividend yield of Avnet Inc. is 1.46%. The forward dividend yield of Avnet Inc. stock is 1.45%. Avnet Inc. had an annual average earnings growth of 0.90% over the past five years.

Babcock & Wilcox Enterprises Inc. (BW, Financial)

FPA Capital Fund (Trades, Portfolio) added 356,019 shares of Babcock & Wilcox. At quarter-end, it had 1,956,429 shares, a 22.25% increase. The stock represents 6.22% of the portfolio and had an average quarterly share price of $16.

Babcock & Wilcox Enterprises Inc. has a market cap of $779.940 million; its shares closed at $16.02 with and P/S ratio of 0.48.

See FPA Capital Fund (Trades, Portfolio)’s portfolio here.