FPA Crescent’s Steven Romick on Finding Value in the Stock Market
Searching for value in the stock market is one of the ways First Pacific Advisors (FPA) puts investors first and CNBC interviewed Steven Romick to get his latest ideas. Romick runs the FPA Crescent fund, a Morningstar five star and gold rated fund. Robert Rodriguez is the CEO of FPA and has received accolades over the years for his money managing prowess.
Romick commmented on a trip he took to Spain with his daughter, who recently graduated from high school. Romick visited Barcelona and Madrid and learned from talking to people that there are “a ton” of people who are literally spending their time playing video games and watching television. For people under 30 the unemployment rate is about 45%, which is a little misleading due to the black market economy, according to Romick.
CNBC’s Tyler Matheson asked Romick to comment on two of his holdings which have recently begun to perform very well; Wal-Mart (WMT) and Microsoft (MSFT). Romick said their firm has a saying that “good things happen in cheap stocks.” They looked at Wal-Mart as an infinite duration bond with a rising coupon. Romick said he doesn’t know of any other company that over the past 15 years has had operating margins only move 50 basis points. If WMT grew earnings 3-7 percent a year and bought back stock at 2-3 percent a year (bought back 22% over the last decade), and in addition had a dividend yield of 2.5%, at the cost FPA purchased WMT they are getting a conservatively estimated return of between 7 and 13 percent, Romick said. This return is much better than the stock market, much better than bonds, and they’re very happy to own it, he added. Romick pointed out that WMT has recently risen which has raised its PE from 11 to 14 times earnings, so they are not as enamored with it as they were.
Romick mentioned Microsoft which had bad news in 2010-2011 and the common perception was that everyone in tech was “eating their lunch.” When asked to comment on Microsoft’s new Surface tablet Romick said it was too early to tell how well it will do. Romick said people don’t realize the value they are getting in Microsoft including patents and what computer manufacturers are paying them, so any good news could drive the stock higher.
Matheson asked Romick to comment on “cash and risk,” since 25% of the Crescent fund is currently in cash. Romick said cash is a consequence of what they are doing and it builds up as a byproduct of what they aren’t finding, or are finding in the market. They aren’t beholden to the idea that they have to be invested. If something they own gets expensive they sell it a cash builds up by default. Their cash level was as high as 45% in 2008. When small cap stocks were incredibly cheap in the late 90’s their cash level dropped to 5%.
When asked in a pre-interview how they mitigate risk since Morningstar rates the fund very on high on risk/reward metrics (amongst the best in the business), Romick had said they weren’t so concerned with matching the market or beating the market, but doing it with less than market risk. Romick said they try to avoid permanent impairment of capital. If they don’t see values along the way. He added they don’t care about sector weightings as they relate to the indexes. We prepare for the worst and hope for the best, he added. The best way to do that is to understand the downside of each of your individual investments and be willing to buy down if they’re going down.
Disclosure: I currently own shares of Microsoft and Wal-Mart.