Headline: Making Money In Mutuals FPA Goes For Gold, Takes Storage Tech Profits
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Buying what's out of fashion is often the trademark of "value"
money managers.
Robert L. Rodriguez, who runs FPA Capital Fund of Los Angeles, is
no exception.
However, few can match Rodriguez's all-star performance the past
five years. His fund racked up a 25.2% average annual return,
surpassing the 22.4% of the S&P 500. That earns it an "A"
performance rating from IBD.
FPA Capital, with $821 million, is part of the FPA family of funds
that handles $2.9 billion.
Rodriguez and FPA's other managers focus on typical value
parameters such as earnings, book value, replacement cost of assets
and free cash flow. Studying FPA's stock picks is a lesson - in most
cases - of astute buying.
"Each portfolio manager goes their own way when picking stocks,"
Rodriguez said. "We get together about once a week and hash out what
we know. Nothing is formal. We have a high level of non-overlap.
That's because of the nuances in each of our value styles."
FPA's value focus also explains why some of its top holdings have
low Earnings Per Share ranks. IBD's proprietary system places a
premium on strong quarterly earnings, which aren't a top priority for
value players.
The largest holding in the FPA family in terms of dollar value is
Storage Technology Corp., a maker of computer-storage and networking
products. FPA held 860,000 Storage shares as of the latest reporting
period ended Dec. 31, according to data compiled by IBD.
The past 12 months, Storage soared from 34 to 83. Twenty of those
points have come this year.
True to its style of value investing, FPA funds began building a
position in Storage in '97 when the stock was correcting. FPA
increased its stake by 360,000 shares from January '97 through
September. The funds then took some profits in the fourth quarter.
Storage's stock advanced on strong earnings growth of 32% in the
second half of '97, slightly more than expected. The firm recently
posted a 17% gain in first-quarter net, topping forecasts by
analysts. The stock has a 96 Earnings Per Share rank.
"I've owned Storage off-and-on for seven years, and it's been
challenging," Rodriguez said. "The firm has an excellent market
share in tape-data storage. It is a company that generates large
levels of free cash flow and has no debt.
"At one point last year, Storage's stock got as low as six times
net after-tax free cash flow. In essence, one could have thought of
it as buying an apartment building with its own cash flow without
putting up any capital."
FPA turned what appeared to be a disaster into a winning situation
with its handling of Green Tree Financial Corp.
It held one million shares of the finance firm in '97 but saw the
stock sink from 501/4 in October to 19 by December. The reason:
Green Tree increased reserves and ultimately restated '96 and '97
profits. However, FPA stepped up and boosted its stake by 487,000
shares in the fourth quarter - buying into the selloff.
The gutsy strategy paid off. Green Tree rallied to 40 this year
with the move being topped off by a buyout by insurer Conseco Inc.
So, where has FPA been putting its money lately? Gold is one
place.
Trying to exploit the sell-off in gold stocks late last year, FPA
boosted its stake in Placer Dome Inc. to 2.9 million shares by Dec.
31 from 1.7 million as of Sept. 30. FPA Paramount Fund is the big
holder.
The stock did poorly through '97, declining from 22 to 121/2 by
year end. Since then, it rallied modestly near 15. The Street sees
a profit this year of 25 cents a share after losses the past two
years.
FPA boosted its interest in Homestake Mining Co. to 2.7 million
shares as of Dec. 31 from 2.2 million shares at the end of the third
quarter. Homestake's stock fell in '97 from a high of 165/8 to 73/4.
However, this year it has rallied 35% to 12.
FPA also owns Newmont Mining Co., its sixth-largest holding. It
lifted its position in the gold stock to 1.2 million shares as of
Dec. 31 from 1.05 million three months before.
"We feel reasonably well about the gold stocks," said William
Sams, who runs the FPA Paramount Fund. Europe's new currency, the
Euro, will be backed by gold. A decision is expected soon on just
how much gold will be held in reserve. An amount greater than 15% of
reserves would be bullish, he says.
FPA took some major new positions in the fourth quarter.
A big bet was made on Tricon Global Restaurants. The stock is an
October spinoff of PepsiCo. Tricon operates 30,000 Kentucky Fried
Chicken, Taco Bell and Pizza Hut restaurants.
The stock has risen from a low of 251/8 in January to about 31.
Tricon's net income will be weak in the first half, but is expected
to improve in the second half. The Street expects a 12% growth rate
in earnings the next several years.
"We like the stock because Tricon's management is very
aggressive," Sams said. "The real story is that Kentucky Fried
Chicken is going over very well in Asia. Our cost for the stock is
$31 a share. I'd be a buyer if it dips to $28."
FPA established a new position in Triton Energy Ltd., buying one
million shares in the fourth quarter. The move already has paid off.
The stock surged from 291/4 to near 40 this year. In March, Triton's
CEO, Thomas G. Finck, disclosed at an analyst meeting that all or
part of the firm may be sold.
"We sold about 250,000 shares of Triton this year around 40
because it had a good run," Sams said. "If Triton is sold, we think
it could fetch $45 to $50 a share."
Polymer Group Inc. was another new purchase. FPA bought two
million shares in the fourth quarter. The company makes fabrics used
for hand wipes, bandages and diapers. This year the stock rose from
91/2 to 12. The Street is looking for 34% growth in '98 and 18% next
year.
"The company has a smart CEO who is aggressive," Sams said. "He
bought 2.5 million shares of the stock with his own money for $22
million. He is a brilliant guy with a lot of patents. I don't see
much risk."
FPA also took a new stake in Oregon Steel Mills, picking up
681,500 shares in the fourth quarter. Oregon is a turnaround play.
Analysts see a 222% rebound in net to $1.45 a share this year from 45
cents last year. The stock rose from 173/4 in December to 221/2. |
