John Keeley is the President and Portfolio Manager/Analyst of Keeley Asset Management Corp., a company that he founded in 1982. Currently he has four mutual funds under management:
Keeley Small Cap Value Fund, Keeley Mid Cap Value Fund, Keeley Small-Mid Cap Value Fund, and Keeley All Cap Value Fund. GuruFocus tracks the equity portion of this funds, which as of end of 4Q08, has 356 stocks or $6 billion assets. The portfolio outperformed the general market YTD by about 5.5% through May 8, 2009.
Committed to Industrial Space
John Keeley’s sale of AIMC is an exception from his commitment to Industrial companies. In his latest Fund Commentary – 1 ST Quarter 2009, John Keeley stated that he is committed to stocks within the industrial space and believe they offer tremendous value on a long-term basis. Here is an enthusiastic quote from the document:
We recognize they are cyclical in nature and their businesses have been hindered by the depth of this recession and the breadth of the credit freeze. The majority of stocks we hold in this sector are financially sound with strong balance sheets and positive cash flows. We have confidence in their ability to self-finance their growth through this environment. Additionally, we continue to believe in the need to rebuild. infrastructure, both here in the U.S. and abroad. We believe the secular trend of global infrastructure development will outlast the short-term cyclical impact of this recession. Many of our stocks in the energy, materials, and industrials sectors should benefit once these investments in infrastructure begin. Moreover, many of our holdings were experiencing strong growth and order backlogs before the credit crisis brought the global economy to a standstill and we believe much of this growth can resume once economic activity returns. We recognize this may take time and these companies may face headwinds in the short-term. Yet our research does not focus on the short-term. We are trying to identify how these companies will perform 3-5 years down the road. At current valuations levels, we are enthusiastic about their futures and confident that our patience will be rewarded.
Comments on Other Holdings
In the latest Fund Commentary, John reflected on some of other holdings in his portfolio:
Zep Inc. (ZEP)
Zep Inc. (ZEP) fell over 47 percent and cost the portfolio 84 basis point in performance (of Keeley All Cap Value Fund – Editor). The industrial cleaning product maker saw earnings fall short due to in large part to increased raw material costs. Zep was spun-off from Accuity Brands back in 2007, and we remain optimistic about their long-term prospects.
Integrys Energy Group (TEG) and Covanta Holdings Corp. (CVA)
Utilities was the largest detractor (of Keeley Mid-Cap Value Fund – Editor) in the first quarter due primarily to Integrys Energy Group (TEG), which declined over 53 percent and cost the fund 155 basis point of return. The utility operator fell sharply in late February when it forecasted earnings far below analysts expectations. Covanta Holdings Corp. (CVA) was the second largest detractor during the quarter, falling over 40 percent and costing the portfolio 131 basis points of performance. The slowing economy has put downward pressure on their sales and earnings, but we remain bullish on the long-term prospects of the waste to renewable energy company. Additionally, the recent stimulus bill as well as future investments in energy and infrastructure should benefit the company.
FairPoint Communications (FRP), Solutia (SOA), Broadridge Financial (BR)
Our largest detractor (of Keeley Mid-Small Cap Value Fund – Editor) during the quarter was FairPoint Communications (FRP), which fell over 89 percent and cost the fund 125 basis points of performance. The communications service provider posted a higher fourth quarter loss amid rising costs and suspended its dividend to protect its balance sheet.
The materials sector was the second largest detractor from the fund in the first quarter, falling over 22 percent and costing the fund 300 basis points of return. Solutia (SOA) was the leading detractor during the quarter, falling over 58 percent and costing the fund 89 basis points of performance. The maker of specialty chemicals saw demand drop off dramatically in the fourth quarter as well as losses in their nylon business, which was eventually sold in March.
Although we have limited exposure to the sector, technology was a positive contributor to performance in the first quarter. Broadridge Financial (BR) was the largest single contributor as it rose over 48 percent and contributed 54 basis points of return to the fund. Although BR is placed into the technology sector, we view it more as a financial services firm. The technology outsourcing company produced strong quarterly earnings results and reaffirmed its positive outlook for 2009.
Hanover Insurance Group (THG)
The financial sector was the second largest detractor from performance (of Keeley Small Cap Value Fund – Editor) of in the first quarter. The Hanover Insurance Group (THG) was the most significant, falling over 32 percent and costing the fund 64 basis points of performance. We mentioned last quarter that we were intrigued by opportunities in the insurance industry, specifically in the property and casualty area. The demise of AIG has allowed smaller players to gain market share through increasing volume and some companies are also experiencing price increases. We continue to be intrigued with stocks in this industry such as THG.