A review of legendary investor Robert Rodriguez, his early years, what changed his investing philosophy and life. Also a review of his portfolio.
Robert Rodriguez is one of the Gurus with great long term track record. He manages FPA Fund for more than 20 years. Over the past 20 years, FPA Capital Fund has returned more than 16.57%, outperforming S&P500’s 11.19% by more than 5% a year. How did he achieve this? What did he learn during early years that make him one of the greatest investors? What has he been doing differently from others?
The Early Years
Robert Rodriguez is a first generation American, his father emigrated from Mexico speaking no English. He worked hard in school and became the first one in his family to attend university. After knocking on many doors he entered a growth/aggressive-growth style investment firm, thinking one should be able to earn a 20%-25% return per year easily. He moved up to analyst and portfolio manager.
1974 was the turning point for his career, he witnessed capital destruction of the likes that had not been seen since the Great Depression. He said in a speech: “The last half of that year was one of chaos and extreme fear. I was fortunate not to be managing much money at that time; however, I was not spared from this pain in my personal account. It was during this collapse that I really began to question the growth/aggressive-growth style of investment management. It really hit home when I had my largest personal investment position collapse. I began buying this stock at $22 and averaged down all the way to $8, where I ran out of money. It eventually bottomed at $7/8.”
The Discovery of Value Investing and Charlie Munger
What is he doing wrong? He was very puzzled. It was when he discovered a book that changed his life: Security Analysis by Benjamin Graham and David Dodd. In the same year, he had a great luck of meeting Charlie Munger. After all the studies, he realized that value investing requires great self-discipline and a dedication to reducing the emotional aspects of investing to as small a level as is humanly possible, value investor has to walk a lonely road.
Robert Rodriguez’s concentrated investing style is inspired by Charlie Munger’s "lemon meringue pie" theory of investing. Charlie Munger described how a bakery had a special sale of fifty cents per pie. This was fantastic since he loves lemon meringue pie. Not only could he buy a pie, he could buy the entire production. A production snafu had led to the bakery over producing lemon pies and, therefore, the baker was looking for a way to get rid of them. Charlie appeared to be magnanimous because he said he would take the entire lot and that he would return with a truck to pick them all up. Why would he do this? It seems that down the road there was another town that had a craving for lemon pies and the people there were willing to pay $3 per pie. The moral of the story was, when you find your lemon-pie investment opportunity, don't buy just a little, back up the truck and buy everything.
"Diversification is the hobgoblin of small minds with little confidence." as Charlie Munger said. In light of this, Robert Rodriguez spends a huge amount of time looking and researching. He makes a limited number of investments per year and holds them for an extended period of time. His average portfolio turnover has been less than 20%, holding between 30 and 35 stocks, with the top 10 representing 40% to 60% of the average portfolio, typically having between 35% and 50% in two industries.
Summary of Investing Philosophy
Robert Rodriguez listed these key attributes in summarizing his contrarian investment style,
- Focus on market leadership or niche companies that are in industries that are perceived to be out of favor and unloved — a bottom-up strategy.
- Select companies that have strong balance sheets — typically with total debt to total capital of less than 40%.
- They must be at a significant valuation discount to the market and its historical valuation parameters.
- Acquire them at modest premiums to book value and at less than 1x revenues.
- They should be on or close to being on the new low list.
- Have a long-term investment time frame — typically three to five years.
Robert Rodriguez is willing to take large cash positions if he cannot find great value stocks, even though this hurt his short term performance. Currently he holds more than 30% in cash, and his fund has been closed to new investors since 2004.
Regarding the elevated level of cash, he wrote in his shareholder letter: “ Our liquidity level is the residual of investment opportunity. We do not attempt to forecast how much liquidity we should have. For many years, we had a minimal level of liquidity because attractive investment opportunities were quite abundant. This is not the case at the current time.” Robert Rodriguez likes to quote what James Gipson once said: “You never know the value of liquidity until you need it and don’t have it.” James Gipson was the former manager of Clipper Fund. He achieved outstanding performance with Clipper Fund, and was once in our List of Gurus. He left Clipper Fund last year and went out of GuruFocus radar. His position was taken by Chris Davis.
Sector and Industries
Robert Rodriguez is extremely positive with energy stocks (read Robert Rodriguez’s Perspectives on Energy Stocks). Energy stocks is now more than 30% of his portfolio. He said: “Despite the price runup in energy stocks during the past five years, this sector represents barely 10% of the S&P 500. This is up from a low of approximately 5%, but it is down from the 1979 peak of over 30%. Notice that the energy sector topped out at a level that was very close to where the technology sector peaked in 2000. Though it has been a strong performer these past five years, its significance, as a percentage of the major averages, is still substantially less than other periods when a sector has become “the” sector to own.”
On the other hand, he is very cautious with financial stocks: “… the financial-services sector currently represents over 22% of the S&P 500. After nearly 25 years of interest-rate declines and the explosion in financial derivatives and questionable lending practices, we prefer to be invested in energy rather than in financial services.” “ We are not so sure that the fall-out from ‘the sub-prime markets seems largely to be contained.’ (Ben Bernanke Quote)” (Read Robert Rodriguez's Perspective on Financial Stocks and Sub-Prime Loans) Financial stocks weigh less than 4% of his total portfolio.
#1. ENSCO International Incorporated (ESV) (10.32%)
It is not surprising that Robert Rodriguez’s No. 1 holding is an energy company. ENSCO International Incorporated operates as an offshore contract drilling company in the United States and internationally. Ensco International Inc. has a market cap of $9.76 billion, it was traded at around $65.9 with P/E ratio of 11.68 and P/S ratio of 5.05.
ENSCO International Incorporated is also owned by David Dreman, who owns 50,670 shares as of 03/31/2007, an increase of 329.41% of from the previous quarter. This position accounts for 0.01% of the $19.6 billion portfolio of Dreman Value Management.
#2. Avnet, Inc. (AVT) ( 9.07%)
Avnet, Inc. distributes electronic components, enterprise network and computer products, software, and embedded subsystems primarily in Americas, the Middle East, Asia, Africa, and Europe. Avnet Inc. has a market cap of $6.38 billion, it was traded at around $43.3 with P/E ratio of 19.33 and P/S ratio of 0.43.
Robert Rodriguez owns 3,152,600 shares as of 06/30/2007, a decrease of -36.89% of from the previous quarter. This position accounts for 9.07% of the $1.378 billion equity portfolio of FPA Capital.
#3. Trinity Industries, Inc., (TRN) (7.72%)
Trinity Industries, Inc provides various products and services for the transportation, industrial, construction, and energy sectors primarily in the United States. Trinity Industries Inc. has a market cap of $3.51 billion, it was traded at around $45.16 with P/E ratio of 13.81 and P/S ratio of 1.09.
Robert Rodriguez owns 2,444,350 shares as of 06/30/2007, a decrease of -2% of from the previous quarter.
#4. Patterson-UTI Energy, Inc (PTEN) (7.55%)
Patterson-UTI Energy, Inc is the second oil company Robert Rodriguez owns. It provides onshore contract drilling services to independent oil and natural gas operators in North America. Patterson-UTI Energy Inc. has a market cap of $3.89 billion, it was traded at around $25.46 with P/E ratio of 6.44 and P/S ratio of 1.60.
Robert Rodriguez owns 3,972,300 shares as of 06/30/2007, which accounts for 7.55% of his equity holdings. He commented: “Investors are fearful that land-drilling day rates will decline because exploration and development companies will begin to defer some of their drilling activities. At our recent purchase price, PTEN could experience a 50% decline in earnings and we would still be paying barely 10x earnings. The company has no short- or long-term debt and is currently repurchasing stock.”
#5. Rowan Companies, Inc. (RDC) (7.06%)
Rowan Companies, Inc. is the third oil company Robert Rodriguez owns. Rowan provides a range of onshore and offshore contract drilling services in the United States and internationally. The company's drilling operations are conducted primarily in the Gulf of Mexico, the Middle East, the North Sea, Tr... Rowan Companies Inc. has a market cap of $4.91 billion, it was traded at around $45.7 with P/E ratio of 14.36 and P/S ratio of 3.02.
Robert Rodriguez owns 2,374,300 shares as of 06/30/2007, which accounts for 7.06% of his equity holdings. Regarding to his purchases of Rowan, he said: “ We added to our Rowan Companies holding because we believe the offshore-drilling business environment is extremely attractive currently, and we expect this trend to continue for a very long time. The company has no net debt while selling at less than 10x this year’s earnings. With a shortage of jack-up rigs internationally along with a balance between demand and supply in the Gulf of Mexico , offshore drilling day rates are extremely attractive for Rowan.”
Top 5 holdings account for more than 41% of his total equity holdings.