Steven Romick Sells Short Russell 2000 ETF in 1st Quarter

Guru trims 4 positions from his portfolio

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Apr 11, 2017
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Steven Romick (Trades, Portfolio), portfolio manager of the FPA Crescent Fund, seeks value through an eclectic variety of securities: company stocks, corporate bonds and convertible bonds.

Romick’s portfolio consists of both long and short positions, especially stocks that the consensus does not wish to own. Such companies have low price-earnings (P/E) valuations and trade at discounts to private market value. During the quarter ending March 31, Romick sold short the iShares Russell 2000 (IWM). The manager also trimmed his position in four companies: American Express Co. (AXP, Financial), Alleghany Corp. (Y, Financial), Cisco Systems Inc. (CSCO, Financial) and Analog Devices Inc. (ADI, Financial).

iShares Russell 2000 ETF

Romick sold short 305,290 shares of the Russell 2000 exchange-traded fund at an average price of $136.63 per share. With this transaction, the manager pared 0.44% of his portfolio.

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According to Investopedia, the Russell 2000 index “tracks the performance of approximately 2,000 small-cap companies in the Russell 3000 index.” Such companies have a market cap between $300 million and $2 billion. The index currently has a P/E ratio of 21.77 and a price-book (P/B) ratio of 2.22.

American Express

Romick axed 41.29% of his stake in American Express, selling 1,849,800 shares at an average price of $78.18 per share. With this transaction, the manager trimmed 1.45% of his portfolio.

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The New York credit services company has moderately strong financial strength albeit low cash-to-debt ratios and interest coverage. Although it is near a 10-year high, the company’s interest coverage is still below Ben Graham’s required threshold of 5. This suggests that American Express has moderate debt burden.

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Despite poor interest coverage, American Express has good operating margin and revenue per share growth. The company’s operating margin and return on equity outperform 60% and 88% of competitors. Based on its revenue per share trend, American Express has a GuruFocus business predictability rank of 3.5 stars.

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While American Express trades below its Peter Lynch earnings line, the company’s price and price-sales (P/S) ratio is near a two-year high.

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Alleghany

The FPA Crescent Fund manager sold his 153,351 share stake in Alleghany, a New York property and casualty reinsurance business. During the first quarter, the company’s stock averaged $623.74 per share, close to a 10-year high.

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While the company has a profitability rank of 6, Alleghany has declining operating and net margins, the latter currently near a 10-year low. Additionally, Alleghany’s return on equity and return on assets underperform 71% and 57% of property and casualty insurance companies.

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Cisco Systems

Romick trimmed 13.09% of his stake in Cisco, selling 1,542,550 shares at an average price of $32.43 per share. With this transaction, the manager pared 0.49% of his position.

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The San Jose networking company is moderately overvalued, and it trades above its Peter Lynch earnings line. Cisco also has a P/S ratio near a five-year high.

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Although the company has expanding operating margins, Cisco’s return on equity and three-year revenue growth rate is currently near a 10-year low. This suggests that the company has declining sales growth during the past three years.

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Analog Devices

Romick pared 14.89% of his position in Analog Devices, selling 555,750 shares at an average price of $78.53 per share. With this transaction, the manager trimmed 0.43% of his portfolio.

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The semiconductor company has a Piotroski F-score of 7, suggesting a good business operation. Even though the company’s interest coverage is near a 10-year low, Analog’s Altman Z-score of 5.69 suggests little financial distress.

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Despite good financial strength and profitability, Analog Devices is significantly overvalued. The company’s P/B ratio and P/S ratio both rank lower than 86% of competitors and are near a 10-year high.

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Disclosure: The author has no positions in the stocks mentioned.

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