"There is no prize for predicting rain. There is only a prize for building an ark."
For a time, it seemed to be true in the negative sense for the Investment Guru, Robert Rodriguez, Chief Investment Officer of FPA Capital.
Predict Rain and Build an Ark
Back in 2005, he started to preach the financial perils of highly leverage companies such as Fannie Mae, Freddie Mac, and American International Group. And back in 2007, worried about a credit crisis that would snowball into a severe recession, he declared a stock purchase moratorium and started to keep as much as 45% of his fund asset in cash.
Investors did not feel like to pay a fee for him to keep almost half of their money in cash, so they started to redeem shares. In the past two years, he had see a net of more than $1 billion redemption.
Then in October of 2008, the financial disaster predicted by Robert Rodriguez finally came and he was ready to jump back in. The move proved to be too early. By the end of year, when all were said and done, his flag ship stock fund FPA Capital Fund lost 35%.
However, aside from admitting the well-know investment mistake of buying into Circuit City, which filed for bankruptcy protection and liquidated, Robert Rodriguez and his lieutenants explain his approach to stock investments, in particular, his large holding in Oil and Gas companies in a letter to shareholders. This is from Dennis Bryan, one of Robert Rodriguez’s right-hand man:
During these turbulent economic times, it is helpful to remind shareholders of our investment philosophy and what guides us as managers to allocate the Fund’s capital. To refresh everyone’s memories, our investment philosophy is to buy market-leading companies, which have a history of generating reasonable profits, have a strong management team, and are trading at an absolute, not a relative, cheap valuation based on normalized earnings. For the last couple of years, the Fund’s cash level was substantially higher than at any time over the previous two decades. Beyond the macroeconomic problems which we have discussed in our prior letters over the last two years or so, the four investment criteria outlined above were not present and, therefore, we husbanded the cash until better valuations appeared in the market.
After the recent 30-40% decline in the various stock market indices, we are now getting the opportunity to deploy capital in modest amounts for the first time in over five years. While we expect continued high volatility for the remainder of the year, with sharp increases and declines in daily stock prices, more companies’ valuations are now reflecting some of the downside risks we have been discussing over the last couple of years. However, despite the huge price declines we have all witnessed over the last few weeks, we would not expect to be fully invested until we see more evidence that the fundamentals of businesses are stabilizing and that our downside risk is well compensated for in the share price of the individual investments we make. Thus, we are more willing today than in the previous five years to allocate capital to companies that meet our very strict investment requirements, now that valuations have dropped more than 40% for many companies, but the pace at which we deploy the portfolio’s capital will be measured.
In Robert Rodriguez and his team’s opinion, they not only predicted the rain and they also built the ark. It is not that there is no prize, the prize is merely delayed.
FPA Capital Fund is Well-oiled For The Up Turn
After Yearend 2008, FPA Capital Fund continued its decline through early March 2009, then it marched higher and never looked back. Year-to-date (April 17, 2009), the fund is up 10.61%, compared to S&P 500’s 3.73% decline. Robert Rodriguez has so far out performed the market by a large 14.34% margin. Especially after April 1, 2009, the fund has returned more than 21% and the gap between the fund and S&P 500 has been widening:
Robert Rodriguez’s superb YTD performance owes to the large Oil & Gas holdings.
According to GuruFocus data, companies in the following list each has more than 4% in weighting:
|Ticker||Sector||1Q09 Weighting||Price Change Since 1Q09|
|ESV||Oil & Gas||10.74%||21.90%|
|PTEN||Oil & Gas||7.14%||46.50%|
|RDC||Oil & Gas||6.16%||26.60%|
|NFX||Oil & Gas||5.46%||27.20%|
|PDE||Oil & Gas||4.38%||27.40%|
|ROSE||Oil & Gas||4.17%||46.70%|
|BJS||Oil & Gas||4.07%||24.30%|
The top seven most weighted Oil & Gas companies: Ensco International (NYSE:ESV), PettersonUTI Energy (NASDAQ:PTEN), Rowan Companies (NYSE:RDC), Newfield Exploration (NYSE:NFX), Pride International (PDE), Rosetta Resources (NASDAQ:ROSE), and BJ Services Company (BJS) together weights 42% of the total portfolio. Stock price of each company has climbed from 21.90% (NASDAQ:PTEN) to 46.70%(NASDAQ:ROSE). The heavy weighting in the Oil & Gas company, and the outstanding short surge since the end of March 2009 has propelled the overall performance of Robert Rodriguez’s fund.
Robert Rodriguez's Magnificent Seven
GuruFocus provides a Compare tool for investors to get a glimpse of the list of companies. After entering the symbols, I get the following data back on the seven most weighted Oil & Gas companies that Robert Rodriguez own:
|Market Cap ($mil)||4,562||2,010||1,715||3,827||3,977||371||3,613|
|Operating Margin (%)||47.28||16.53||20.72||18.66||27.33||19.75||10.78|
|Net Margin (%)||46.49||15.71||19.33||-16.77||36.32||-37.66||10.52|
|Debt to Equity (%)||6||0||13||68||16||41||14|
In addtion, we provide a brief introduction for each of the seven companies for you to dig further.
1. ENSCO International (NYSE:ESV)
ENSCO International Incorporated is an international offshore contract drilling company that also provides marine transportation services in the Gulf of Mexico. ENSCO International Inc. has a market cap of $4.56 billion; its shares were traded at around $32.17 with a P/E ratio of 3.8 and P/S ratio of 1.8. The dividend yield of ENSCO International Inc. stocks is 0.3%. ENSCO International Inc. had an annual average earning growth of 12.8% over the past 10 years.
2. PettersonUTI Energy (NASDAQ:PTEN)
Patterson is a provider of domestic land drilling services to major & independent oil & natural gas companies. The Company focuses its operations in Texas & southeast New Mexico. The Company is also engaged in the development exploration acquisition & production of oil and natural gas; however due to the substantial growth in the Company's drilling contract operations, the oil & natural gas operations are no longer material to the Company's overall operations. PattersonUTI Energy Inc. has a market cap of $2.01 billion; its shares were traded at around $13.13 with a P/E ratio of 5.6 and P/S ratio of 0.9. The dividend yield of PattersonUTI Energy Inc. stocks is 1.6%. PattersonUTI Energy Inc. had an annual average earning growth of 26% over the past 10 years. GuruFocus rated PattersonUTI Energy Inc. the business predictability rank of 2-star.
3. Rowan Companies (NYSE:RDC)
Rowan Companies Inc. is a major provider of international and domestic offshore contract drilling services. The Company also owns and operates a manufacturing division that produces equipment for the drilling mining and timber industries. Rowan Companies Inc. has a market cap of $1.71 billion; its shares were traded at around $15.16 with a P/E ratio of 3.7 and P/S ratio of 0.7. Rowan Companies Inc. had an annual average earning growth of 10.9% over the past 10 years.
4. Newfield Exploration (NYSE:NFX)
Newfield Exploration Company explores develops and acquires oil and natural gas properties primarily in the Gulf of Mexico. Newfield Exploration Company has a market cap of $3.83 billion; its shares were traded at around $28.87 with a P/E ratio of 9.2 and P/S ratio of 1.7. Newfield Exploration Company had an annual average earning growth of 19.1% over the past 10 years. GuruFocus rated Newfield Exploration Company the business predictability rank of 4-star.
5. Pride International (PDE)
Pride is an international provider of contract drilling and related services, operating both offshore and on land. In recent years Pride has focused its growth strategy on the higher margin offshore and international drilling markets. Pride International Inc. has a market cap of $3.98 billion; its shares were traded at around $22.91 with a P/E ratio of 6.2 and P/S ratio of 1.8. Pride International Inc. had an annual average earning growth of 4.5% over the past 10 years.
6. Rosetta Resources (NASDAQ:ROSE)
Rosetta Resources Inc. is an independent oil and gas company engaged in the acquisition exploration development and production of primarily natural gas properties in North America. Its exploration and production activities are concentrated in the Sacramento Basin of California South Texas the Gulf of Mexico and the Rocky Mountains. It operates with its proved reserves and maintain a high degree of control over our capital expenditure budget and other operating matters. Rosetta Resources Inc. has a market cap of $371 million; its shares were traded at around $7.26 with a P/E ratio of 3.8 and P/S ratio of 0.7.
7. BJ Services Company (BJS)
BJ Services Company is a provider of pressure pumping and other oilfield services. The Company's pressure pumping services consist of cementing and stimulation services, used in the completion of new oil and natural gas wells and in remedial work on existing wells, both onshore and offshore. BJ Services Company has a market cap of $3.61 billion; its shares were traded at around $12.37 with a P/E ratio of 6.2 and P/S ratio of 0.6. The dividend yield of BJ Services Company stocks is 1.6%. BJ Services Company had an annual average earning growth of 24.7% over the past 10 years. GuruFocus rated BJ Services Company the business predictability rank of 3-star.