(GuruFocus, September 15, 2009) Investment Guru Kenneth Heebner, the head of Capital Growth Management has been loved and hated (mostly hated lately) by his investors, admired and mocked (mostly mocked lately). His CGM Focus Fund outperformed the market routinely by a large margin, especially in 2007, it outperformed S&P 500 by a hefty 74.4%. He manages three mutual funds, but Focus Fund has most asset so it is a good proxy. To the rest of us, at the time the guy was a genius who can turn stone into diamond. It is in that year, users in GuruFocus voted him Guru of The Year. Then 2008 came, he made two mistakes: first he exited commodity stocks too late and then he entered the financials too soon. In 2008, the CGM Focus Fund declined 48.2% vs. S&P 500’s -37%.
2009 has not been stellar for Ken Heebner either. As pointed out first by GuruFocus user stockdocx99 in this post, the Focus Fund had a YTD perform that lags S&P500 by a large margin (4.04% vs.16.17%, not counting dividend and capital gain distribution). Other users, such as commodity are even less forgiving, called Ken Heebner a “ Momentum investors get killed in a market crash”. We thought Ken Heebner’s 10-year record (data feature newly available in GuruFocus for some Gurus, but I copy and paste here) entitles him a place in this website, and we will continue to monitor his moves in investing.
Performance of CGM Focus Fun
What went wrong with Ken Heebner’s strategy in the past year and a half? GuruFocus user DaveinHackensack offered a very plausible explanation in this trace (you have to scroll down to get to his part, the long post in the middle) although he also asked some questions that can only be answered by Ken Heebner, himself. Anyone know Mr. Heebner among our users? Do you think you can help us set up a web-based Q&A with him? We really want to know.
A close look at CGM Fund’s holding can offer some clue what went wrong may not be avoidable. Focus Fund has a total of 20 stocks in the portfolio (hence the name “Focus”). In order to generate the kind of returns that it demonstrated in the past, one almost has to bet a significant portion on names that the market absolutely misjudged. Then in 2008, nobody wants Financials and financials are cheap. When the Financials’ bottom fell out, Heebner could not double down as investors do not share his conviction. Waves of redemption forced his hand. He had to sell instead of buying. Look at what happened to Financials after March, 2009. Everyone could call Heebner a genius over again if he lives in a world where no redemption is permitted.
But that is a big “IF”.
On his poor performance, I still want to offer my perspective: we tend to give value investor the benefit of evaluating them based on long-term performance because of their long –term approach to stock investing. To the frequent traders, we tend not to be so lenient. Let’s be fair. His ten year average through June 30, 2009 is 15.9%, beat that! Just remember, it is not all smooth return.
Current Outlook
In the CGM Focus Fund’s Semi-annual Report, Heebner gave his current assessment on economy and inflation:
His repeated his assessment on a benign inflationary environment in the following two CNBC interviews:
This one was on August 12, 2009, right after Fed left the Fed rate unchanged:
And this is from August 27, 2009:
Major Shift in Portfolio
We found Ken Heebner adjusted his holding rather significant. He increased holdings in technology (from 4.9% to 11.7%) , Financials (32.8% to 41.4%), Consumer Goods (5.6 to 9.9%), and Oil and Gas (6% to 9.8%), and reduced holdings in health care (18.8% to 11.9%) and Consumer Services (28.2% to 12%).
That is what Heebner typically do. He tends to turn over the portfolio rather frequently, so if you want to follow him in allocating your money, be aware! He is not Warren Buffett or Bruce Berkowitz, he is more like George Soros who come in and out of the market and make a kill.
His top six holdings:
[b] No. 1: Goldman Sachs Group Inc. The (GS, Financial), Weighting: 6.78% - 2,812,100 Shares
Goldman Sachs is a global investment banking and securities firm providing a full range of investing advisory and financing services worldwide to a substantial and diversified client base which includes corporations financial institutions governments and high net worth individuals. (Company Press Release) Goldman Sachs Group Inc. The has a market cap of $90.85 billion; its shares were traded at around $177.71 with a P/E ratio of 34.4 and P/S ratio of 1.7. The dividend yield of Goldman Sachs Group Inc. The stocks is 0.8%. Goldman Sachs Group Inc. The had an annual average earning growth of 24.5% over the past 10 years.
Heebner held a small position of 298,00 shares as of 1Q06, he increased his holdings most noticeably in 1Q09 when he increased his stake from 759,000 shares to 2.8 million shares. He held his position steady in 2Q09.
No. 2: Ford Motor Company (F, Financial), Weighting: 5.96% - 59,963,000 Shares
Ford Motor Company produces cars and trucks. The company and its subsidiaries also engage in other businesses including manufacturing automotive components and systems and financing and renting vehicles and equipment. The company is divided up into the following four operating segments: Automotive Visteon Automotive Systems Ford Motor Credit Company and The Hertz Corporation. Ford Motor Company has a market cap of $23.81 billion; its shares were traded at around $7.39 with and P/S ratio of 0.2.
Heebner had a small position of 5.2 million shares in 3Q07 but has increased dramatically to 78.5 million shares in 2Q08. In recent quarters, he has been reducing shares in the companies. In 2Q09, he held almost 60 million shares.
No. 3: Abbott Laboratories (ABT, Financial), Weighting: 4.47% - 5,806,500 Shares
Abbott Laboratories is a global broad-based health care company devoted to discovering new medicines new technologies and new ways to manage health. Abbott products span the continuum of care from nutritional products and laboratory diagnostics through medical devices and pharmaceutical therapies. Abbott comprehensive line of products encircles life itself addressing important health needs from infancy to the golden years. Abbott Laboratories has a market cap of $73.17 billion; its shares were traded at around $47.33 with a P/E ratio of 13.6 and P/S ratio of 2.5. The dividend yield of Abbott Laboratories stocks is 3.4%. Abbott Laboratories had an annual average earning growth of 4.4% over the past 10 years. GuruFocus rated Abbott Laboratories the business predictability rank of 5-star.
Heebner had position of 1.3 million shares back in 2Q03, which he held until 3Q08 when he increased to 7.9 million shares in 3Q08 and 9.3 million shares in 4Q08. He sold some shares in 1Q09 (redemption?) but increased from 5.0 million to 5.8 million shares in 2Q09.
No. 4: Petroleo Brasileiro S.A.Petrobras (PBR, Financial), Weighting: 4.24% - 6,330,000 Shares
PETROBRAS-ADR C is an integrated company operating in exploration production refining retailing and transportation of petroleum and its byproducts at home and abroad. Petroleo Brasileiro S.a.petrobras has a market cap of $193.07 billion; its shares were traded at around $44.08 with a P/E ratio of 11.7 and P/S ratio of 1.5. The dividend yield of Petroleo Brasileiro S.a.petrobras stocks is 0.8%. Petroleo Brasileiro S.a.petrobras had an annual average earning growth of 48% over the past 5 years.
Heebner had a 28.3 million shares position in 3Q2000 when the stock price was at $7.52 per share! He has been trading in and out the stock several times since then. Most recently in 2Q09, he increased from 5.8 million shares to 6.3 million shares.
No. 5: J.C. Penney Company Inc. (JCP, Financial), Weighting: 4.05% - 8,617,700 Shares
JCPenney is one of America's leading retailers operating department stores throughout the United States and Puerto Rico as well as one of the largest apparel and home furnishing sites on the Internet jcp.com and the nation's largest general merchandise catalog business. Through these integrated channels JCPenney offers a wide array of national private and exclusive brands. J.c. Penney Company Inc. has a market cap of $7.57 billion; its shares were traded at around $32.12 with a P/E ratio of 20.1 and P/S ratio of 0.4. The dividend yield of J.c. Penney Company Inc. stocks is 2.5%. J.c. Penney Company Inc. had an annual average earning growth of 6.2% over the past 10 years.
Again, Heebner had a position (5.3 million shares) in JCP back in 2000. And again, he has been trading back and forth with this stock since them. Most recently, he increased his holdings to 8.6 million shares from 1.2 million shares in 2Q09.
No. 6: Bank of America Corp. (BAC, Financial), Weighting: 3.99% - 18,486,200 Shares
Bank of America Corp. is one of the world's leading financial services companies. Bank of America provides individuals small businesses and commercial corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives. The company enables customers to do their banking and investing whenever wherever and however they choose. Bank Of America Corp. has a market cap of $146.99 billion; its shares were traded at around $16.99 with a P/E ratio of 30.3 and P/S ratio of 2. The dividend yield of Bank Of America Corp. stocks is 0.2%. Bank Of America Corp. had an annual average earning growth of 7.5% over the past 10 years.
Heebner had 8.2 million shares way back in 2Q1999, he has been trading in and out of this stock since then, and most recently, he increased his holding from less than one million shares to 15.6 million shares in 3Q09. In 2Q09, he increased further to 18.5 million shares. This is one of the stocks he bought too early.
Conclusions
In summary, as Ken Heebner said in the 2009 Semi-annual Report: ” On June 30, 2009, CGM Focus Fund held significant positions in money center banks and the retail and independent oil production industries. The Fund’s three largest holdings were Ford Motor Company, The Goldman Sachs Group, Inc. and Amazon.com, Inc. “
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Ken Heebner for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
Click to read our review of Heebner's Top Purchases during the quarter.
2009 has not been stellar for Ken Heebner either. As pointed out first by GuruFocus user stockdocx99 in this post, the Focus Fund had a YTD perform that lags S&P500 by a large margin (4.04% vs.16.17%, not counting dividend and capital gain distribution). Other users, such as commodity are even less forgiving, called Ken Heebner a “ Momentum investors get killed in a market crash”. We thought Ken Heebner’s 10-year record (data feature newly available in GuruFocus for some Gurus, but I copy and paste here) entitles him a place in this website, and we will continue to monitor his moves in investing.
| Year | Return (%) | S&P500 (%) | Excess Gain (%) |
|---|---|---|---|
| 2008 | -48.2 | -37 | -11.2 |
| 2007 | 80 | 5.61 | 74.4 |
| 2006 | 15 | 15.79 | -0.8 |
| 2005 | 25.2 | 4.91 | 20.3 |
| 2004 | 12.4 | 12 | 0.4 |
| 2003 | 66.5 | 28.7 | 37.8 |
| 2002 | -17.8 | -22.1 | 4.3 |
| 2001 | 47.4 | -11.9 | 59.3 |
| 2000 | 53.9 | -9.1 | 63.0 |
| 1999 | 8.5 | 21 | -12.5 |
What went wrong with Ken Heebner’s strategy in the past year and a half? GuruFocus user DaveinHackensack offered a very plausible explanation in this trace (you have to scroll down to get to his part, the long post in the middle) although he also asked some questions that can only be answered by Ken Heebner, himself. Anyone know Mr. Heebner among our users? Do you think you can help us set up a web-based Q&A with him? We really want to know.
A close look at CGM Fund’s holding can offer some clue what went wrong may not be avoidable. Focus Fund has a total of 20 stocks in the portfolio (hence the name “Focus”). In order to generate the kind of returns that it demonstrated in the past, one almost has to bet a significant portion on names that the market absolutely misjudged. Then in 2008, nobody wants Financials and financials are cheap. When the Financials’ bottom fell out, Heebner could not double down as investors do not share his conviction. Waves of redemption forced his hand. He had to sell instead of buying. Look at what happened to Financials after March, 2009. Everyone could call Heebner a genius over again if he lives in a world where no redemption is permitted.
But that is a big “IF”.
On his poor performance, I still want to offer my perspective: we tend to give value investor the benefit of evaluating them based on long-term performance because of their long –term approach to stock investing. To the frequent traders, we tend not to be so lenient. Let’s be fair. His ten year average through June 30, 2009 is 15.9%, beat that! Just remember, it is not all smooth return.
Current Outlook
In the CGM Focus Fund’s Semi-annual Report, Heebner gave his current assessment on economy and inflation:
While there are always worries about inflation any time the Fed floods the economy with dollars, we believe the current 9.5% high unemployment rate and a domestic manufacturing capacity utilization rate of only 68% should inhibit inflationary pressure for the intermediate future. For the time being, the Federal Reserve Board is maintaining its target rate of 0%-.25% for Federal Funds and at the conclusion of its meeting in late June, issued the statement: “inflation will remain subdued for some time.” If true, the recovery should continue with little danger of higher mortgage rates choking off its progress. We believe the equity market will gradually reflect the healing process of theeconomy which appears to be now underway.
His repeated his assessment on a benign inflationary environment in the following two CNBC interviews:
This one was on August 12, 2009, right after Fed left the Fed rate unchanged:
And this is from August 27, 2009:
Major Shift in Portfolio
We found Ken Heebner adjusted his holding rather significant. He increased holdings in technology (from 4.9% to 11.7%) , Financials (32.8% to 41.4%), Consumer Goods (5.6 to 9.9%), and Oil and Gas (6% to 9.8%), and reduced holdings in health care (18.8% to 11.9%) and Consumer Services (28.2% to 12%).
That is what Heebner typically do. He tends to turn over the portfolio rather frequently, so if you want to follow him in allocating your money, be aware! He is not Warren Buffett or Bruce Berkowitz, he is more like George Soros who come in and out of the market and make a kill.
| Industry | 2009-03-31 | 2009-06-30 |
|---|---|---|
| Technology | 4.9% | 11.7% |
| Financials | 32.8% | 41.4% |
| Telecommunications | 0.4% | % |
| Consumer Services | 28.2% | 12% |
| Health Care | 18.8% | 11.9% |
| Consumer Goods | 5.6% | 9.9% |
| Industrials | 2.3% | 1.8% |
| Basic Materials | 0.4% | 0.5% |
| Oil & Gas | 6% | 9.8% |
His top six holdings:
[b] No. 1: Goldman Sachs Group Inc. The (GS, Financial), Weighting: 6.78% - 2,812,100 Shares
Goldman Sachs is a global investment banking and securities firm providing a full range of investing advisory and financing services worldwide to a substantial and diversified client base which includes corporations financial institutions governments and high net worth individuals. (Company Press Release) Goldman Sachs Group Inc. The has a market cap of $90.85 billion; its shares were traded at around $177.71 with a P/E ratio of 34.4 and P/S ratio of 1.7. The dividend yield of Goldman Sachs Group Inc. The stocks is 0.8%. Goldman Sachs Group Inc. The had an annual average earning growth of 24.5% over the past 10 years.
Heebner held a small position of 298,00 shares as of 1Q06, he increased his holdings most noticeably in 1Q09 when he increased his stake from 759,000 shares to 2.8 million shares. He held his position steady in 2Q09.
No. 2: Ford Motor Company (F, Financial), Weighting: 5.96% - 59,963,000 Shares
Ford Motor Company produces cars and trucks. The company and its subsidiaries also engage in other businesses including manufacturing automotive components and systems and financing and renting vehicles and equipment. The company is divided up into the following four operating segments: Automotive Visteon Automotive Systems Ford Motor Credit Company and The Hertz Corporation. Ford Motor Company has a market cap of $23.81 billion; its shares were traded at around $7.39 with and P/S ratio of 0.2.
Heebner had a small position of 5.2 million shares in 3Q07 but has increased dramatically to 78.5 million shares in 2Q08. In recent quarters, he has been reducing shares in the companies. In 2Q09, he held almost 60 million shares.
No. 3: Abbott Laboratories (ABT, Financial), Weighting: 4.47% - 5,806,500 Shares
Abbott Laboratories is a global broad-based health care company devoted to discovering new medicines new technologies and new ways to manage health. Abbott products span the continuum of care from nutritional products and laboratory diagnostics through medical devices and pharmaceutical therapies. Abbott comprehensive line of products encircles life itself addressing important health needs from infancy to the golden years. Abbott Laboratories has a market cap of $73.17 billion; its shares were traded at around $47.33 with a P/E ratio of 13.6 and P/S ratio of 2.5. The dividend yield of Abbott Laboratories stocks is 3.4%. Abbott Laboratories had an annual average earning growth of 4.4% over the past 10 years. GuruFocus rated Abbott Laboratories the business predictability rank of 5-star.
Heebner had position of 1.3 million shares back in 2Q03, which he held until 3Q08 when he increased to 7.9 million shares in 3Q08 and 9.3 million shares in 4Q08. He sold some shares in 1Q09 (redemption?) but increased from 5.0 million to 5.8 million shares in 2Q09.
No. 4: Petroleo Brasileiro S.A.Petrobras (PBR, Financial), Weighting: 4.24% - 6,330,000 Shares
PETROBRAS-ADR C is an integrated company operating in exploration production refining retailing and transportation of petroleum and its byproducts at home and abroad. Petroleo Brasileiro S.a.petrobras has a market cap of $193.07 billion; its shares were traded at around $44.08 with a P/E ratio of 11.7 and P/S ratio of 1.5. The dividend yield of Petroleo Brasileiro S.a.petrobras stocks is 0.8%. Petroleo Brasileiro S.a.petrobras had an annual average earning growth of 48% over the past 5 years.
Heebner had a 28.3 million shares position in 3Q2000 when the stock price was at $7.52 per share! He has been trading in and out the stock several times since then. Most recently in 2Q09, he increased from 5.8 million shares to 6.3 million shares.
No. 5: J.C. Penney Company Inc. (JCP, Financial), Weighting: 4.05% - 8,617,700 Shares
JCPenney is one of America's leading retailers operating department stores throughout the United States and Puerto Rico as well as one of the largest apparel and home furnishing sites on the Internet jcp.com and the nation's largest general merchandise catalog business. Through these integrated channels JCPenney offers a wide array of national private and exclusive brands. J.c. Penney Company Inc. has a market cap of $7.57 billion; its shares were traded at around $32.12 with a P/E ratio of 20.1 and P/S ratio of 0.4. The dividend yield of J.c. Penney Company Inc. stocks is 2.5%. J.c. Penney Company Inc. had an annual average earning growth of 6.2% over the past 10 years.
Again, Heebner had a position (5.3 million shares) in JCP back in 2000. And again, he has been trading back and forth with this stock since them. Most recently, he increased his holdings to 8.6 million shares from 1.2 million shares in 2Q09.
No. 6: Bank of America Corp. (BAC, Financial), Weighting: 3.99% - 18,486,200 Shares
Bank of America Corp. is one of the world's leading financial services companies. Bank of America provides individuals small businesses and commercial corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives. The company enables customers to do their banking and investing whenever wherever and however they choose. Bank Of America Corp. has a market cap of $146.99 billion; its shares were traded at around $16.99 with a P/E ratio of 30.3 and P/S ratio of 2. The dividend yield of Bank Of America Corp. stocks is 0.2%. Bank Of America Corp. had an annual average earning growth of 7.5% over the past 10 years.
Heebner had 8.2 million shares way back in 2Q1999, he has been trading in and out of this stock since then, and most recently, he increased his holding from less than one million shares to 15.6 million shares in 3Q09. In 2Q09, he increased further to 18.5 million shares. This is one of the stocks he bought too early.
Conclusions
In summary, as Ken Heebner said in the 2009 Semi-annual Report: ” On June 30, 2009, CGM Focus Fund held significant positions in money center banks and the retail and independent oil production industries. The Fund’s three largest holdings were Ford Motor Company, The Goldman Sachs Group, Inc. and Amazon.com, Inc. “
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Ken Heebner for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
Click to read our review of Heebner's Top Purchases during the quarter.
