(GuruFocus, January 19, 2010) As announced back in March 2009, Investment Guru Robert Rodriguez stepped down from the day-to-day management of FPA Capital Funds. He is taking a sabbatical year in 2010 and will be back next year, only as an advisor. Rodriguez left the fund management responsibilities of the firm’s flagship FPA Capital Fund to Dennis Bryan and Rikard Ekstrand.
Rodriguez left behind a legacy that is hard to beat: since the inception of the fund (6/30/1984) and through September 30, 2009, FPA Capital Fund has returned 14.70% per year on average, after deducting the 5.25% sales charge. The fund is ranked as number one U.S. diversified equity fund out of 216 such funds with twenty-five year records by Lipper Analytical.
For the past 10 years, during a period in which general market has declined, FPA Capital Fund still returned an average of 8.96%. Since the beginning of 2008, the fund has returned about incredible 60%.
Rodriguez has made some serious money for his investors and we wish his successor will just be as successful. Despite the change in the men behind the wheel, we will continue to follow the FPA Capital Fund under the name of “Robert Rodriguez”, the same as we did for Jean-Marie Eveillard for First Eagle Global Fund, as long as they serve as investment advisor to the respective fund.
Investment Strategy
As many of the successful value investors that tracked by GuruFocus, Rodriguez achieved his outstanding return by holding a very concentrated portfolio, betting on 2-3 undervalued sectors at any given time, and keeping a healthy amount cash if no value to be had.
In the latest quarterly investor letter, the two new managers, Dennis Bryan and Rikard Ekstrand reiterated Robert Rodriguez’s investment strategy, which they pledge to follow:
For the serious students of Robert Rodriguez, Bryan and Ekstrand went on and disclosed the details of their investment process in the same letter:
Buy Program Between October 2008 and March 2009
It should be noted that FPA Capital Fund’s recent success is a result of the seeds it sowed in later 2008. The Fund started a buy program since October 2008. Not only it was good timing, the stock purchased in the program exhibited gains that beat the market by a large margin. Here are the words from the Bryan and Ekstrand:
The Latest Investment Activities
Ten months and some 100% gains later (counting from March 9 lows), The FPA Capital Fund managers are less enthusiastic in buying stock. As a matter of fact, they did not buy any stock last quarter, and the trend continued into the quarter that ended on December 31, 2009. GuruFocus data shows that FPA Capital continued to shed positions in the following stocks:
Reliance Steel & Aluminum Co. (RS, Financial)
Reliance Steel & Aluminum Co. is a metals service center companies in the United States. Reliance Steel & Aluminum Co. has a market cap of $3.27 billion; its shares were traded at around $44.46 with a P/E ratio of 26.78 and P/S ratio of 0.38. The dividend yield of Reliance Steel & Aluminum Co. stocks is 0.9%. Reliance Steel & Aluminum Co. had an annual average earning growth of 20.1% over the past 10 years.
FPA Capital Fund sold 14.53% of its position in RS in 4Q09 and ended the quarter with 475,108 shares.
PattersonUTI Energy Inc. (PTEN, Financial)
Patterson is a provider of domestic land drilling services to major & independent oil & natural gas companies. Pattersonuti Energy Inc. has a market cap of $2.76 billion; its shares were traded at around $17.98 with a P/E ratio of 35.25 and P/S ratio of 1.25. The dividend yield of Pattersonuti Energy Inc. stocks is 1.11%. 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 2.5-star.
FPA Capital Fund sold 21.68% of its position in PTEN in 4Q09 and ended the quarter with 2.8 million shares.
Avnet Inc. (AVT, Financial)
Avnet Inc. is an industrial distributors of electronic components and computer products. Avnet Inc. has a market cap of $4.25 billion; its shares were traded at around $28.09 with a P/E ratio of 16.62 and P/S ratio of 0.26. Avnet Inc. had an annual average earning growth of 25% over the past 5 years.
FPA Capital Fund sold 15.36% of its position in AVT in 4Q09 and ended the quarter with 2.5 million shares.
Conclusion
Robert Rodriguez and his team continued selling stock positions and raised cash in 4Q09.
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Rodriguez left behind a legacy that is hard to beat: since the inception of the fund (6/30/1984) and through September 30, 2009, FPA Capital Fund has returned 14.70% per year on average, after deducting the 5.25% sales charge. The fund is ranked as number one U.S. diversified equity fund out of 216 such funds with twenty-five year records by Lipper Analytical.
For the past 10 years, during a period in which general market has declined, FPA Capital Fund still returned an average of 8.96%. Since the beginning of 2008, the fund has returned about incredible 60%.
Rodriguez has made some serious money for his investors and we wish his successor will just be as successful. Despite the change in the men behind the wheel, we will continue to follow the FPA Capital Fund under the name of “Robert Rodriguez”, the same as we did for Jean-Marie Eveillard for First Eagle Global Fund, as long as they serve as investment advisor to the respective fund.
Investment Strategy
As many of the successful value investors that tracked by GuruFocus, Rodriguez achieved his outstanding return by holding a very concentrated portfolio, betting on 2-3 undervalued sectors at any given time, and keeping a healthy amount cash if no value to be had.
In the latest quarterly investor letter, the two new managers, Dennis Bryan and Rikard Ekstrand reiterated Robert Rodriguez’s investment strategy, which they pledge to follow:
we would like to repeat and reinforce what Bob laid out a quarter of century ago in his first client letter. Namely, our investment strategy is to own a concentrated group of businesses with leadership positions that are trading substantially below their intrinsic value and hold those investments for the long term. The strategy also includes owning companies that have a strong management team with a proven track record of success and that have a history of good profitability. That is, we do not want to speculate that a company might one day become profitable, rather we want to see a history of good returns on capital and profits. The investment strategy further endeavors to invest in companies with strong balance sheets, exhibited by limited private or public debt. Lastly, our strategy embraces an "ownership" mentality rather than Wall Street's commonly held view today that stocks only should be "rented." Our long-term view allows to us to increase the odds of compounding our clients' assets at attractive returns, and not be seduced into selling a holding because of short-term perception changes by other investors or traders.
For the serious students of Robert Rodriguez, Bryan and Ekstrand went on and disclosed the details of their investment process in the same letter:
Our investment process boils down to searching for and understanding why industry leading companies are selling at bargain prices, and then determining whether they ought to be included in our clients' portfolios. The process starts with identifying the companies that meet certain quantifiable metrics. For example, we want to buy small- to mid-capitalization companies so we screen for companies within a range of market capitalizations between $1 billion and $4 billion. We have several other key metrics for which we screen and additional ways to identify our initial list of potential stocks for the portfolios, including identifying companies whose stock prices are trading at their 52-week low.
After we identify potential investments, we then start a thorough fundamental analysis that often quickly weeds out many companies that passed the initial identification stage. The analysis includes a rigorous review of a company's financial statements, often extending back a decade or longer. This step also includes assessing the company's operations and its competitive position; our goal here is to avoid value traps. The fundamental analysis can take many months to complete, and sometimes ends because we cannot sufficiently understand the risks posed by owning equity in a complex or challenging business.
The third step is to put all the companies which have passed the first two steps through a valuation analysis. This step includes analyzing a company's valuation based on its sales, earnings, cash flow, and book value. Finally, the companies that pass all three steps are then candidates for inclusion in our clients' portfolios. At this point we may end up with between 20-40 companies for the portfolios that we manage, and three industry sectors often represent more than 50% of the portfolio's assets.
The important factor to remember is that we have been executing this strategy everyday for nearly the past two decades at FPA, and Bob has been doing it for the last twenty-five years at our firm. We do not expect any changes to this fairly simple investment strategy, but the key is to execute the strategy when the valuations warrant either a buy or sell of a security. One of Bob's favorite terms is that we like to invest in the "land of tall trees." That is, we don't want a bunch of small positions, but rather a few great saplings that will grow as their dominance in the market earn larger profits for shareholders. Thus, our job is to continue to follow the trail map that we have been on and periodically prune back investments as they reach maturity and occasionally plant a new seed that will bear fruit and be ready to harvest in five, ten, or more years down the road.
Buy Program Between October 2008 and March 2009
It should be noted that FPA Capital Fund’s recent success is a result of the seeds it sowed in later 2008. The Fund started a buy program since October 2008. Not only it was good timing, the stock purchased in the program exhibited gains that beat the market by a large margin. Here are the words from the Bryan and Ekstrand:
One variable of the portfolio that continued to pay big rewards was the buy program that we started in the fall of 2008, and one which we have mentioned in our prior shareholder letter. To refresh memories, from October 2008 through March 2009, we deployed roughly 35-40% of the portfolio's cash reserves to nineteen different stocks, and we have tracked the performance of these purchases. This buy program was the largest of its kind in terms of names and dollars for the portfolios under our management. As of September 30, 2009, the buy program generated a return in aggregate of 83%, versus returns of 11.56% and 8.11%, respectively, for the Russell 2500 and Russell 2000. During the same time frame, the S&P 500 returned 6.11%. Another way of measuring the buy program's success is to understand that this tranche of investment dollars has contributed approximately 30% of this year's return.
The Latest Investment Activities
Ten months and some 100% gains later (counting from March 9 lows), The FPA Capital Fund managers are less enthusiastic in buying stock. As a matter of fact, they did not buy any stock last quarter, and the trend continued into the quarter that ended on December 31, 2009. GuruFocus data shows that FPA Capital continued to shed positions in the following stocks:
Reliance Steel & Aluminum Co. (RS, Financial)
Reliance Steel & Aluminum Co. is a metals service center companies in the United States. Reliance Steel & Aluminum Co. has a market cap of $3.27 billion; its shares were traded at around $44.46 with a P/E ratio of 26.78 and P/S ratio of 0.38. The dividend yield of Reliance Steel & Aluminum Co. stocks is 0.9%. Reliance Steel & Aluminum Co. had an annual average earning growth of 20.1% over the past 10 years.
FPA Capital Fund sold 14.53% of its position in RS in 4Q09 and ended the quarter with 475,108 shares.
PattersonUTI Energy Inc. (PTEN, Financial)
Patterson is a provider of domestic land drilling services to major & independent oil & natural gas companies. Pattersonuti Energy Inc. has a market cap of $2.76 billion; its shares were traded at around $17.98 with a P/E ratio of 35.25 and P/S ratio of 1.25. The dividend yield of Pattersonuti Energy Inc. stocks is 1.11%. 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 2.5-star.
FPA Capital Fund sold 21.68% of its position in PTEN in 4Q09 and ended the quarter with 2.8 million shares.
Avnet Inc. (AVT, Financial)
Avnet Inc. is an industrial distributors of electronic components and computer products. Avnet Inc. has a market cap of $4.25 billion; its shares were traded at around $28.09 with a P/E ratio of 16.62 and P/S ratio of 0.26. Avnet Inc. had an annual average earning growth of 25% over the past 5 years.
FPA Capital Fund sold 15.36% of its position in AVT in 4Q09 and ended the quarter with 2.5 million shares.
Conclusion
Robert Rodriguez and his team continued selling stock positions and raised cash in 4Q09.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Robert Rodriguez for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
