Steven Romick Plugs Into First Energy, Covers Short Positions in 4th Quarter

Guru releases portfolio for final quarter of 2020

Jan 21, 2021

Steven Romick (Trades, Portfolio) disclosed his fourth-quarter 2020 portfolio earlier this week.

Part of Los Angeles-based investment firm First Pacific Advisors (Trades, Portfolio), the guru manages the FPA Crescent Fund along with Brian A. Selmo and Mark Landecker. Taking both long and short positions, the fund's objective is to generate returns with less risk than the market while avoiding permanent loss of capital. Its strategy combines deep research with a focus on strong fundamentals, attractive risk-reward and diversification across geographies, market caps, sectors and capital structure.

During the quarter, Romick entered one new position, sold out of two holdings and added to or trimmed a slew of other investments. Among his most notable trades were a new stake in FirstEnergy Corp. (FE, Financial), the divestment of Microsoft Corp. (MSFT, Financial), reductions of the Baidu Inc. (BIDU, Financial) and American International Group Inc. (AIG, Financial) holdings and a boost to the Aon PLC (AON, Financial) position. He also covered two short positions in the SSGA Financial Select Sector SPDR (XLW, Financial) exchange-traded fund and W.W. Grainger Inc. (GWW, Financial).

FirstEnergy

Romick invested in 2.78 million shares of FirstEnergy (FE, Financial), allocating 1.15% of the equity portfolio to the stake. The stock traded for an average price of $29.93 per share during the quarter.

The Akron, Ohio-based electric utility company has a $16.95 billion market cap; its shares were trading around $31.25 on Thursday with a price-earnings ratio of 23.31, a price-book ratio of 2.36 and a price-sales ratio of 1.55.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 3 out of 10 also supports this assessment.

GuruFocus rated FirstEnergy's financial strength 3 out of 10. As a result of issuing approximately $2.8 billion in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 0.54 warns the company could be in danger of going bankrupt if it does not improve its liquidity position.

The company's profitability fared a bit better with a score of 5 out of 10. Although the operating margin is expanding, FirstEnergy is being weighed down by returns that largely underperform competitors. It also has a moderate Piotroski F-Score of 5, indicating business conditions are stable, but the predictability rank of one out of five stars is on watch as a result of declines in revenue per share and operating income losses over the past several years. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Microsoft

With an impact of -2.36% on the equity portfolio, the guru sold his 744,724 remaining shares of Microsoft (MSFT, Financial). During the quarter, shares traded for an average price of $215.16 each.

GuruFocus estimates Romick gained 163.12% on the investment.

The software company, which is headquartered in Redmond, Washington, has a market cap of $1.7 trillion; its shares were trading around $224.54 on Thursday with a price-earnings ratio of 36.27, a price-book ratio of 13.77 and a price-sales ratio of 11.71.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 1 out of 10 also aligns with this analysis since the share price, price-book ratio and price-sales ratio are all approaching 10-year highs.

Microsoft's financial strength was rated 7 out of 10 by GuruFocus, driven by a comfortable level of interest coverage. The high Altman Z-Score of 7.47 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also surpasses the weighted average cost of capital by a wide margin, implying good value creation.

The company's profitability scored a 9 out of 10 rating on the back of an expanding operating margin as well as strong returns that outperform a majority of industry peers. Microsoft has a high Piotroski F-Score of 8, which indicates business conditions are healthy, as well as consistent earnings and revenue growth. It also has a 2.5-star predictability rank. GuruFocus says companies with this rating return an average of 7.3% annually.

With 0.30% of outstanding shares, Ken Fisher (Trades, Portfolio) is Microsoft's largest guru shareholder. Other top guru investors include PRIMECAP Management (Trades, Portfolio), Pioneer, Dodge & Cox, Chase Coleman (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Steve Mandel (Trades, Portfolio), Frank Sands (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio).

Baidu

Impacting the equity portfolio by -1.33%, the investor curbed the Baidu (BIDU, Financial) holding by 50.08%, selling 695,159 shares. The stock traded for an average per-share price of $149.33 during the quarter.

Romick now holds 692,881 shares total, which represent 2.02% of the equity portfolio. GuruFocus estimates he has lost 3.88% on the investment since establishing it in the second quarter of 2016.

The Chinese tech company, which provides internet and artificial intelligence services, has an $88.75 billion market cap; its shares were trading around $258.93 on Thursday with a price-earnings ratio of 26.28, a price-book ratio of 3.45 and a price-sales ratio of 5.94.

Based on the Peter Lynch chart, the stock appears to be overvalued.

GuruFocus rated Baidu's financial strength 6 out of 10. Although it has poor interest coverage and assets are building up at a faster rate than revenue is growing, the Altman Z-Score of 3.73 indicates it is in good standing. The WACC also eclipses the ROIC, indicating it struggles with creating value.

The company's profitability fared much better, scoring an 8 out of 10 rating even though the operating margin is in decline and revenue per share growth has slowed down over the past 12 months. Baidu's returns are outperforming over half of its competitors. It is also being supported by a high Piotroski F-Score of 7 as well as a one-star predictability rank.

Jim Simons (Trades, Portfolio)' Renaissance Technologies is Baidu's largest guru shareholder with a 3.09% stake. Primecap, Dodge & Cox, Sarah Ketterer (Trades, Portfolio), John Rogers (Trades, Portfolio), First Pacific, David Herro (Trades, Portfolio), Tweedy Browne (Trades, Portfolio) and Mason Hawkins (Trades, Portfolio) are also among its top guru investors.

American International Group

Romick trimmed his American International Group (AIG, Financial) stake by 20.53%, selling 2 million shares. The trade had an impact of -0.83% on the equity portfolio. During the quarter, the stock traded for an average price of $35.45 per share.

He now holds 7.7 million shares total, accounting for 3.97% of the equity portfolio. According to GuruFocus data, Romick has gained 0.37% on the investment since establishing it in the second quarter of 2012.

Also known as AIG, the insurance company headquartered in New York has a market cap of $35.75 billion; its shares were trading around $41.40 on Thursday with a price-book ratio of 0.57 and a price-sales ratio of 0.78.

The median price-sales value chart suggests the stock is undervalued. The GuruFocus valuation rank of 7 out of 10 also leans toward undervaluation.

AIG's financial strength was rated 3 out of 10 by GuruFocus. As a result of issuing approximately $4.1 billion in new long-term debt over the past three years, it has poor interest coverage and a low cash-to-debt ratio of 0.08.

The company's profitability did not fare much better, scoring a 4 out of 10 rating on the back of negative margins and returns that underperform a majority of industry peers. It also has a low Piotroski F-Score of 3, which implies operating conditions are in poor shape. AIG's one-star predictability rank is also on watch as a result of declining revenue per share over the past year.

Of the gurus invested in AIG, Hotchkis & Wiley has the largest stake with 3.93% of outstanding shares. Diamond Hill Capital (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, First Pacific, the T Rowe Price Equity Income Fund (Trades, Portfolio) and Bill Nygren (Trades, Portfolio) also have large holdings.

Aon

The guru increased his position in Aon (AON, Financial) by 41.21%, picking up 286,900 shares. The trade had an impact of 0.82% on the equity portfolio. Shares traded for an average price of $204.29 each during the quarter.

Romick now holds 983,127 shares total, making up 2.81% of the equity portfolio. GuruFocus estimates he has gained 138.86% on the investment since establishing it in the fourth quarter of 2009.

The London-based company, which provides professional services like risk, retirement and health solutions, has a $48.24 billion market cap; its shares were trading around $210.83 on Thursday with a price-earnings ratio of 27.24, a price-book ratio of 13.64 and a price-sales ratio of 4.5.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 1 out of 10 agrees with this assessment.

GuruFocus rated Aon's financial strength 5 out of 10. Although the company has issued approximately $1.7 billion in new long-term debt over the past three years, it is at a manageable level due to the adequate level of interest coverage. The Altman Z-Score of 1.79, however, warns the company could be in danger of going bankrupt if it does not improve its liquidity position. ROIC surpasses the WACC, however, indicating good value creation.

The company's profitability scored a 7 out of 10 rating, driven by strong margins and returns that outperform a majority of competitors. Aon also has a high Piotroski F-Score of 7. Although the company has recorded losses in operating income over the past three years, it has a three-star predictability rank on the back of steady earnings and revenue growth. GuruFocus data shows companies with this rank return, on average, 8.2% annually.

Halvorsen is Aon's largest guru shareholder with a 1.32% stake. Gleen Greenberg, Simons' firm, First Pacific, Barrow, Hanley, Mewhinney & Struss, Wallace Weitz (Trades, Portfolio) and Pioneer, among others, also have positions in the stock.

Covering short positions

The FPA Crescent Fund also partially covered its short positions for the SSGA Financial Select Sector SPDR (XLF) and W.W. Grainger (GWW, Financial).

This ETF represents the financial stocks trading on the S&P 500. The XLF ETF short position was established in the first quarter of 2020 and is worth -5.2 million shares. During the third quarter, the fund bought 3.4 million shares of the ETF to cover downside risk. Shares traded for an average price of $26.86 during the period.

The fund also increased the coverage on its short position in industrial supply company W.W. Grainger by 6,713 shares. This short position was originally established in the fourth quarter of 2014 and was worth -96,000 shares at the time, but it has since been completely covered.

Additional trades and portfolio performance

During the quarter, Romick also sold out of Jardine Strategic Holdings Ltd. (SGX:J37, Financial) as well as trimmed the holdings of CIT Group Inc. (CIT, Financial), Jefferies Financial Group Inc. (JEF, Financial) and Bank of America Corp. (BAC, Financial), among several other positions.

The guru's $7.4 billion equity portfolio, which is composed of 50 stocks, is largely invested in the communication services and financial services sectors, followed by the technology space.

The FPA Crescent Fund posted a return on 12.11% for 2020, slightly underperforming the S&P 500's 18.4% return.

Disclosure: No positions.