At the $33.1 billion FPA Crescent Fund, widely followed stock manager Steven Romick (Trades, Portfolio) puts avoiding risk first, but he also embraces volatile markets to make steely buys of plummeting equities.
His cash allocation of 35.7% as of Dec. 31 suggests he sees opportunities that meet his absolute value criteria ahead. The cash also position remains about on par with its level of 35.49% at third quarter-end, when he said in his shareholder letter that he felt “better off just doing nothing instead of putting new investment in the Fund.” The portfolio inactivity did not imply any slack in efforts to research companies to nab.
“In this period of higher prices, we take our completed work and put it on the shelf while patiently awaiting a day when prices offer more attractive opportunities to invest our capital,” he said.
Crescent’s last significant buying excursion, in 2015, dramatically increased share holdings in financial names such as AIG (AIG, Financial), Bank of America (BAC, Financial) and Citigroup (C, Financial). The heavy third-quarter allocation to financials led the portfolio’s gains in the third quarter. It also responded strongly to the “Trump rally” that occurred following the election of U.S. President-elect Donald Trump. The prevailing view that the incoming president would implement policies favorable to business sent the financials-led Crescent Fund returns up 3.68% in November. The sector still has yet to rebound fully to its 2015 prices, according to the Financial Select Sector SPDR Fund.
Crescent still has estimated gains on all but one of its financial holdings, most of which they started earlier and some around five years ago. Those captured the upside of the 109.58% gain in the sector over the past five years, making it the best-performing S&P 500 sector for the period.
Looking into 2016, Romick gave a new sector of interest. He and his time had “spend time researching various companies across the health care subsectors,” he said in a year-end update.
Health care stocks as measured by the Health Care SPDR ETF have ended last year down around one percentage point, missing the 18.03% climb of the S&P 500, as politicians and industry leaders tussled over drug prices. Other investors shared Romick’s interest in the sector as a Trump administration and Republican-dominated congress set the stage to repeal Obamacare and ease talk of pricing controls. The Health Care Select Sector SPDR (XLV, Financial) saw $1.73 billion in inflows over the past three months.
But investors were spooked on Trump’s comment on Wednesday that that pharmaceutical companies were “getting away with murder” by raising drug prices. Biotech and health care indexes declined by several points for the day, possibly making them more attractive to Romick.
As of the end of the fourth quarter, Romick held only one health care position, a diagnostics and research company, Termo Fisher Scientific Inc. (TMO, Financial). He has been trimming the position over the past two years with a roughly 145% total estimated gain based on quarterly average prices.
Here are five health care stocks trading at 15% to 75% discounts to their intrinsic values, based on a DCF calculation.
- Anika Therapeutics (ANIK, Financial): trading at a 21.1% discount to its intrinsic value of $63.33.
- Baxter International (BAX, Financial): trading at a 71.8% discount to its intrinsic value of $95.03.
- Biogen Inc. (BIIB, Financial): trading at a 43% discount to its intrinsic value of $503.89.
- Express Scripts Holding Co. (ESRX, Financial): trading at a 19% discount to its intrinsic value of $89.24.
- Universal Health Services (UHS, Financial): trading at a 40% discount to its intrinsic value of $186.70.
See Steven Romick (Trades, Portfolio)’s portfolio here.
