Robert Rodriguez Weathers the Stock Market
Robert Rodriguez likes to buy stocks at their lows. When there are not enough stocks hitting new lows, he closes his fund and piles up cash. This is what he has been doing lately. His moves deserve attention for good reasons, his $1.7 billion FPA Capital Fund has averaged an annual total return of more than 17% over the last 20 years, net of sales charge, handily beating all the benchmarks by wide margins.
As Robert Rodriguez finds slim pickings in the stock market, his goal has changed to capital preservation. The cash position in his fund has been in steady increase. On March 31, 2005 , it is at 34%. As a reference, between 1984 and 1997, his cash level was rarely above 5% and most of the time it was less than 2%. Now he is sitting on this big trunk of cash, awaiting opportunities. "You never know the value of liquidity until you need it and don't have it." He said, "This is one of those times when it takes a great deal of patience, discipline, and conviction to maintain such a contrarian position, because of the potential business and investment risk that it entails."
Robert Rodriguez' contrarian position in investment goes beyond adjusting the level of cash. He also reduces his fund's weighting in the sectors or industries that he thinks are overpriced. He has done this before. The years of 1979 -1981 was the time of the second oil crisis, oil and gas prices were soaring. Many "experts" were forecasting oil prices of $100 per barrel within ten years. Energy stocks were being valued as growth stocks and represented nearly 31% of the S&P 500's market capitalization. Robert Rodriguez went to the contrary; he liquidated all his energy stocks and bought bonds. The oil mania resulted in large-scale capital destruction with virtually every bank in the state of Texas going bankrupt by 1987.
Robert Rodriguez's contrarian investment style was tested again during the peak of the tech bubble. In March 2000, he analyzed the operating and stock market performances of Microsoft and Cisco Systems, made growth assumptions for them and the U. S. economy. He biased down the expected growth and valuation assumptions for each of these companies. The result was that Microsoft's market valuation would increase to 36% of nominal GDP. Cisco's expected market valuation would rise to 48% of nominal GDP. The combination of these two estimates would equal 84% of GDP by 2010. Apparently (now) the odds of this happening were not great. In light of these trends, he reduced his Fund's exposure to technology stocks. We all know how that bubble ended.
So what sectors does he like or dislike right now? He has energy stocks at 19.3% of the Fund, it is between three and four times the weighting of the various indexes. This is the highest energy allocation that he has had since 1979, when he began selling this sector. Financial service stocks total 2.1%; the lowest allocation he has had in 35 years. His reason: financial sector is at or near-record representation in all the major indexes. Financial service companies represent nearly 21% of the S&P 500's market capitalization -- a 33-year high. They are among the largest components in other stock indexes as well. In terms of operating profits, they comprise almost 28% of the S&P 500.
In summarizing his contrarian investment style, Robert Rodriguez listed these key attributes:
Focus on market leadership or niche companies that are in industries that are perceived to be out of favor and unloved - a bottom-up strategy. Select companies that have strong balance sheets - typically with total debt to total capital of less than 40%.
They must be at a significant valuation discount to the market and its historical valuation parameters.
Acquire them at modest premiums to book value and at less than 1x revenues. They should be on or close to being on the new low list. Have a long-term investment time frame - typically three to five years.