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Sydnee Gatewood
Sydnee Gatewood
Articles (803) 

FPA Capital Fund Buys 1, Sells 2 in 2nd Quarter

Fund swaps 2 energy companies for managed health care company

The FPA Capital Fund (Trades, Portfolio) disclosed it established one new holding and exited two others when it released its second-quarter portfolio this week.

The fund, which is part of Los Angeles-based First Pacific Advisors (Trades, Portfolio), is managed by Arik Ahitov. To achieve its primary objective of long-term capital growth, the fund invests in a concentrated number of small- and mid-cap companies. The portfolio manager looks for value among companies with competitive positions, little to no leverage and three-to-one upside-downside scenarios.

Based on these criteria, the fund entered a position in Magellan Health Inc. (NASDAQ:MGLN) and exited its holdings of Patterson-UTI Energy Inc. (NASDAQ:PTEN) and SM Energy Co. (NYSE:SM) during the quarter.

Magellan Health

FPA invested in 43,138 shares of Magellan Health, allocating 1.89% of the equity portfolio to the holding. The stock traded for an average price of $67.19 per share during the quarter.

The Scottsdale, Arizona-based managed health care company has a $1.71 billion market cap; its shares were trading around $71.50 on Friday with a price-earnings ratio of 149.10, a price-book ratio of 1.32 and a price-sales ratio of 0.25.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

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GuruFocus rated Magellan Health’s financial strength 6.6 out of 10. As a result of issuing approximately $467.04 million in new long-term debt over the last three years, it has poor interest coverage. The Altman Z-Score of 3.93, however, indicates the company is in good fiscal standing.

The company’s profitability and growth scored an 8 out of 10 rating. Although the operating margin is in decline and the returns underperform a majority of competitors, Magellan Health is supported by a moderate Piotroski F-Score of 6, which suggests business conditions are stable. Despite recording consistent earnings and revenue growth over the past decade, the business predictability rank of three out of five stars is on watch. According to GuruFocus, companies with this rank typically see their stocks gain an average of 8.2% per annum over a 10-year period.

Of the gurus invested in Magellan Health, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest position with 2.87% of outstanding shares. During the quarter, Pioneer Investments (Trades, Portfolio) also established a position in the stock, while Steven Cohen (Trades, Portfolio), Richard Snow (Trades, Portfolio) and Hotchkis & Wiley added to their holdings. Ken Fisher (Trades, Portfolio) is also a shareholder.

Patterson-UTI Energy

The fund divested of its 666,215 remaining shares of Patterson-UTI Energy, impacting the equity portfolio by -4.89%. The stock traded for an average per-share price of $12.88 during the quarter.

GuruFocus data shows the fund gained an estimated 40% on the investment since establishing it in the third quarter of 2015.

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The oil well drilling contractor, which is headquartered in Houston, has a market cap of $2.41 billion; its shares were trading around $11.74 on Friday with a price-book ratio of 0.73 and a price-sales ratio of 0.78.

According to the median price-sales chart, the stock is undervalued since it is trading below its historical average.

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Patterson-UTI’s financial strength was rated 5.3 out of 10 by GuruFocus, driven by good cash-debt and debt-to-equity ratios. The Altman Z-Score of 1.68, though, warns the company is in danger of going bankrupt.

Weighed down by negative margins and returns, the company’s profitability and growth scored a 4 out of 10 rating. While the moderate Piotroski F-Score of 6 suggests operating conditions are good, the one-star business predictability rank is on watch as a result of declining revenue per share over the last five years. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.

With 1.69% of outstanding shares, Simons’ firm is Patterson-UTI’s largest guru shareholder. Other top guru investors include Kahn Brothers (Trades, Portfolio), Fisher, Arnold Van Den Berg (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Hotchkis & Wiley, Cohen, T Boone Pickens (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).

SM Energy

The Capital Fund dumped its 420,454 remaining shares of SM Energy, which impacted the equity portfolio by -3.85%. During the quarter, shares traded for an average price of $14.53.

GuruFocus estimates the fund gained a meager 0.28% on the investment since the first quarter of 2009.

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The Denver-based company, which is an oil and gas exploration company serving Texas and the Rocky Mountains, has a $1.24 billion market cap; its shares were trading around $10.85 on Friday with a price-earnings ratio of 122.30, a price-book ratio of 0.42 and a price-sales ratio of 0.74.

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

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Weighed down by poor interest coverage, GuruFocus rated SM Energy’s financial strength 4.3 out of 10. In addition, the Altman Z-Score of 0.74 warns the company is at risk of bankruptcy.

The company’s profitability and growth did not fare much better, scoring a 5 out of 10 rating as a result of margins and returns that underperform a majority of industry peers and declining revenue per share. SM has a high Piotroski F-Score of 7, however, which indicates operating conditions are healthy. In addition, it has a one-star business predictability rank.

Simons’ firm has the largest stake in SM Energy with 1.06% of outstanding shares. Other top guru shareholders include Cohen, First Pacific, Hotchkis & Wiley, Jones and Jeff Auxier (Trades, Portfolio).

Additional trades

During the quarter, the fund beefed up several positions, including MKS Instruments Inc. (NASDAQ:MKSI), Cheesecake Factory Inc. (NASDAQ:CAKE), Valmont Industries Inc. (NYSE:VMI), InterDigital Inc. (NASDAQ:IDCC) and others. It also trimmed its holdings of Western Digital Corp. (NASDAQ:WDC), Avnet Inc. (NASDAQ:AVT) and Frank’s International NV (NYSE:FI), among others.

FPA Capital’s $169 million equity portfolio is composed of 25 stocks. The four largest sectors represented are technology, industrials, consumer cyclical and energy. According to the fund’s website, it underperformed the Russell 2500 in 2018 with a return of -17.61%. The index posted a -10% return.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am an editorial assistant at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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