Where This Value Investor Is Finding a Few Compelling Stock Opportunities
When Steve Romick, the lauded manager of FPA Crescent Fund (symbol FPACX), was asked to speak at the Value Investing Congress two years ago, he had to turn down the opportunity. With the devastating bear market having ended only weeks earlier, he was so busy buying investments at bargain prices that he simply didn't have time to speak. This year? "I have all the time in the world," he told some 300 investors on May 3 at this year's West Coast edition of the value confab, in Pasadena, Cal.
Compelling investment opportunities are few and far between today, Romick says. He places the blame at the doorstep of the U.S. government, which is spending so much more than it collects in tax revenues that it’s building a debt burden that virtually guarantees tepid economic growth. And that’s a best-case scenario. “We have a calm between two crises,” Romick says. “Our children are going to pay for our sins.”
This pessimistic view of the country’s economic prospects has colored Romick’s investment choices. He’s building cash in Crescent, a member of the Kiplinger 25, the list of our favorite no-load mutual funds, and gravitating toward the shares of big companies that are able to generate a significant amount of their income from overseas.
His latest big investment is CVS Caremark Corp. (CVS), a Rhode Island–based drugstore chain and pharmacy-benefits management company that boasts $96 billion in annual revenue. The company has a clean balance sheet and top positions in all of the areas in which it does business, and it is likely to benefit from the expiration of patents on a variety of drugs. (These expirations allow the manufacture of generic equivalents, which are more profitable for drugstores than their brand-name versions.) CVS’s shares, which closed May 5 at $36.79 (up 1.9% for the day in a weak market), trade at 13 times estimated 2011 earnings of $2.77 per share. “We know we’re going to make money on CVS” says Romick. “We just don’t know how much.”
CVS, which is Crescent’s third-largest holding, is representative of Romick’s focus on an aging population and growing spending on health care, a theme that accounts for 12% of the fund’s assets. Other big holdings include Covidien (COV), an Irish medical-device manufacturer, and Omnicare (OCR), a Kentucky-based pharmaceutical-services firm. Energy, accounting for 13% of Crescent’s assets, is the fund’s largest stock-market bet.
But stocks make up less than 60% of the portfolio. At 19% of assets, Romick’s biggest holding as of March 31 was cash.
That the cautious Romick was not fully invested in stocks should not come as a surprise. Crescent has a go-anywhere charter, which allows Romick to invest wherever he sees the best opportunities. He can invest in stocks and all sorts of bonds. He can even sell stocks short in anticipation of declining prices.
Despite the drag of cash in a mostly up stock market, Crescent has performed reasonably well this year. Year-to-date through May 4, the fund returned 6.2%, about the same as its peer group (Morningstar’s “moderate target risk” category) and just 1.5 percentage points behind Standard & Poor’s 500-stock index, which, of course, is fully invested in stocks. Over the past decade, Crescent has crushed the market, returning an annualized 10.6%, compared with 2.6% for the S&P 500.
Romick doesn’t aim to beat the benchmarks every quarter. In fact, the fund’s goal is to get long-term stock-like returns with significantly less risk than the stock market. In a market where risks are rife and bargains are rare, stepping back from the fray may be the best way to play. As the fund’s literature says: “We believe the best way to accomplish our goals is to accept short-term underperformance in exchange for long-term success.”