Mutual Fund Quarterly
FPA Capital has hit a relative rough patch. Last year the
storied, $1.2 billion portfolio topped 85% of its Morningstar
Now, with a 2% loss for the year going into Tuesday that
lagged 99% of its category, the fund's 10-year average annual
return of 8.56% tops "only" 76% of its peers.
But it would be rash to dismiss this thoroughbred fund based
on a turbulent half year.
FPA Capital, now closed to new investors, has long said it is
right only for shareholders who have a long-time horizon, not for
those who get antsy about short-term volatility.
Co-manager Rikard Ekstrand, 47, and Steven Romick, 49, one of
FPA's three managing partners as well as helmsman of $8.7 billion
FPA Crescent , spoke with IBD separately from their offices in
Has the second quarter been a buying opportunity for you,
The first couple of months we kind of nibbled on a couple of
names. We haven't disclosed names yet, so I can't say which
Now (in the past week) and the week before, some names we like
have come down more, so we've gotten more active. We have orders
on the trading desk for several existing names and a few
completely new ones.
So we've added to two E&P names. And we have trading
orders for a couple of oil services names. And one tech name.
We have a new name on the health care side that we're getting
close to adding to. It's within 3% or 4%, maybe 10%, of the price
where we'll buy. And we have a defense related name that's
closer, maybe within 5%.
In a recent commentary, you said the fund gained less than the
broad market in the first quarter due to its large cash
weighting. That was 32% as of March 31. Did you sell a lot of
last year's big gainers?
Yes, the cash position was built as a result of stocks that got
to fair value or a premium.... Cash was 30.56% at the end of
We sold 135% of what we originally invested in E&P names.
We sold 84% of our initial stake in oil services names.
Now we're turning around and putting some of that back in.
Energy wasn't the only sector you trimmed, was it?
Ekstrand: We also trimmed other areas, including retailers,
tech and industrials. We trimmedAvnet (
) andArrow (
) in Q1 on the tech side. We trimmedFoot Locker (
) andSignet (
), alsoTrinity Industries (
). We trimmedRowan (RDC) when it was higher. AlsoBaker Hughes
I still like what we have in those names at their new
Western Digital (WDC) is down. But you're bullish on the stock.
You see earnings and cash flow rising in part due to the firm's
takeover of Hitachi's hard-disk-drive business?
Its price-earnings ratio is around 5. Its price-to-cash flow is
about 3. So we think it is undervalued. We also think the
combination with Hitachi makes the company much stronger.
And the Hitachi move consolidates the industry.
Western Digital generates a lot of their components for disk
drives. Toshiba, which is smaller, has to buy components from
vendors and loses margin on that.
Veeco (VECO) is up this year, though quarterly sales and earnings
per share are slowing. You more than doubled your stake in your
latest disclosure. What do you like?
People are very concerned about the slowdown in orders for the
company. The stock went down from the mid- to high 50s to just
above 20. When it got to the mid 20s we started to get pretty
attracted and felt the negatives were priced into the stock.
We believe the earning power of this business is going to be
in the $3 to $4 range in a normal year. That assumes it sells
about 45% of the industry's 450 to 500 (MOCVD, or metal organic
chemical vapor deposition machines, critical for manufacturing
high-brightness, light-emitting diodes).
You opened a position inFederated Investors (FII) a few
disclosures ago. You've said rising interest rates will help
them. How so?
They have fee waivers to a large extent when rates are so low.
The full-year hit to fees from waivers using the Q1 2012 run rate
is 55 to 60 cents per share.
You increased your stake inInterDigital (IDCC). What's your
The company owns patents related to wireless technology. Two
things can unlock value for this company. One is that they've got
a lawsuit against several of their larger licensing clients, whom
they say have not paid up for their 3G patents. So if they can
make those people pay or find a way to structure (some
settlement), that would unlock value.
Also, they recently entered into an agreement withIntel (INTC)
for $375 million for selling certain patents, which are totally
unrelated to IDCC's fee-generating patents and which would not
impact its fee-generating capacity. Those were 8% of their
overall patent portfolio. The $375 million was worth $6 a share
when the stock was in the 24 range. So the patents were not well
reflected in the stock. If they do more deals like that, that can
unlock more value.
Trinity Industries (
) is down despite two quarters of triple-digit earnings per share
growth. What's your thesis?
When people get nervous about the economy, which they are now,
this stock tends to come under pressure, which it has.
The company leases rail cars. It also makes them. It makes
barges. And it has a construction business.
When we look at the company on a more normalized earning
power, we think it can earn in the $3.50 range. So we think (its
current price) is quite attractive. To realize its value, all we
need is less fear and a moderate economy.
Steven, what is Crescent Fund's key characteristic?
We're a go-anywhere fund. We can buy across the capital
structure, asset classes and market caps. We buy common stock and
preferred, performing credit, distressed, bank debt and an odd
smattering of smaller private equity. Nobody else has that kind
of girth. We're good at buying businesses that have stumbled.
What are some examples?
Currently we have a decent chunk ofOmnicare (OCR). It's down, but
up substantially from where we bought it.
We first started buying in 2007. Then we sold. We didn't like the
management team. We bought back in when the management team
changed. And we like the new CEO, John Figueroa. We like what the
new management has been saying, specifically a focus on better
capital allocation. They're focused on technology and girth.
You've builtTesco (TESO) the past four disclosures. What do you
It was a U.K. business whose competitors caught up and the stock
went down. Now it has a good management team. They're good at
managing capital. And they have terrific market share in emerging
markets, so they're not just a U.K. company.
Tell me why you've been building WPP, an advertising agency.
They've got double-digit returns on equity and double-digit
margins. About 37% of their business is from Europe. That's a
head wind. But as advertising is cut, they don't lose money. They
just make less money. They get 30% of their revenue from emerging
You have a lot of cash. Why?
We have about 25%. That's our historical average. Cash is an
opportunity to put money to work in the future.