FPA Capital released its first portfolio update of 2017, disclosing purchase of two new positions and a raft of oil and gas stocks as it adhered to its guideline of selling equities that approach intrinsic value and buying those with a margin of safety and price discount to intrinsic value.
The first quarter’s activity brought the $858 million fund’s stock positions to 23 in all, cushioned by a 37.2% cash position at year-end. FPA Capital Fund (Trades, Portfolio) centers on small and mid-sized companies vetted through bottom-up research and returned 22.86% last year, beating the 17.59% return in the Russell 2500 benchmark.
The fund’s largest buy in the quarter, Vista Outdoor Inc. (VSTO, Financial), has plunged 60.4% over the past year. FPA Capital purchased 489,820 shares that were priced at $25 on quarterly average, giving the stock a 2.02% position in the portfolio.
Vista Outdoor is a Utah-based maker of outdoorsy products – including firearms – and owner of about 50 brands including CamelBak. The company’s share price decline began with a 17% drop on Aug. 11 to the lowest in more than a year, coinciding with its report that sales had increased overall due to additions from acquisitions and shooting sports gains, but organic sales in its outdoor products segment had weakened in its fiscal first quarter 2017.
Vista Outdoors tumbled another 21.7% on Jan. 11 when the company announced it would incur an impairment charge on its hunting and shooting accessories segment in its third fiscal quarter. Vista linked the $400 to $450 million charge to “challenging market conditions” that required it to discount products. The company’s share price fell again when it restated its fiscal 2017 guidance.
FPA Capital’s other new buy bears the same image of a company hit by negative circumstances.
“In closing, we remain confident about our strategy’s future,” managers wrote in the fourth quarter. “Our pipeline of potential investments remains robust, as evidenced by the new healthcare stock that went into the portfolio during the fourth quarter. This is an example of a domestic company’s stock being depressed partly because of concerns that the expected Clinton administration would have been tough on the overall healthcare industry.”
Shares of pharmaceutical company Akorn Inc. (AKRX, Financial) plunged to their lowest in two years the week before the presidential election and slumped further in the first quarter. FPA Capital purchased 380,120 shares of Akorn at their depressed price, which averaged $22 in the quarter, making it 1.83% of the portfolio.
A rebound in April vaulted the stock to near a 52-week high reached in August, already giving FPA a gain of about 51%.
In oil, FPA changed from selling energy stocks as the price rose in the fourth quarter and added to some positions as the price hovered above $50 for most of the quarter. But the overall presence of the sector in the portfolio slid to 22.5% from 23.4% the previous quarter.
Exploration and production company SM Energy Co. (SM, Financial) was the most increased, with the number of shares owned jumping 55% to 2.23% of the portfolio. FPA also added to drilling company Rowan Companies PLC (RDC, Financial) and exploration and production company Cimarex Energy Co. (XEC, Financial).
See FPA Capital Fund (Trades, Portfolio)'s portfolio here.
