U.S. markets closed

FPA Capital Fund's 1st-Quarter Buys

The FPA Capital Fund (Trades, Portfolio) recently disclosed its portfolio updates for the first quarter of 2020.

Based in Los Angeles, the FPA Capital Fund (Trades, Portfolio) is part of First Pacific Advisors (Trades, Portfolio), a value investing-based money management firm. Aiming at long-term growth of capital, the fund invests in 20 to 40 small-cap and mid-cap holdings, preferring companies with competitive advantages, little to no leverage and 3:1 upside-downside risk scenarios. The current portfolio manager is Arik A. Ahitov, who joined FPA in 2010.


As of the quarter's end, the equity portfolio consisted of 21 stocks valued at $97 million, with a turnover rate of 39%. The top holdings were InterDigital Inc. (IDCC) with a 10.79% weight, Centene Corp. (CNC) with 8.37% and Vonage Holdings Corp. (NASDAQ:VG) with 7.9%.

In terms of sector weighting, the fund was most invested in the technology, consumer cyclical and communication services spaces.

7b794b2238621230de55058225b95550.png

Based on its investing criteria, the fund's new buys for the quarter were Vonage Holdings Corp., Treehouse Foods Inc. (NYSE:THS), Oshkosh Corp. (NYSE:OSK) and Viper Energy Partners LP (NASDAQ:VNOM) during the quarter.

Vonage Holdings

The fund established a new position of 1,063,633 shares in Vonage Holdings, impacting the equity portfolio by 7.9% and making it the third-largest holding. During the quarter, shares traded at an average price of $8.16.

22bdaa4dda1f3a9fe0d1068b53812b7d.png

Vonage is a New Jersey-based business communications provider that was originally founded in 2001 as a residential telecommunications company. It now provides business cloud services as well as residential and business phone plans.

On April 13, shares of Vonage traded around $8.04 for a market cap of $1.94 billion. GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 6 out of 10.

The cash-debt ratio of 0.04 is lower than 88.55% of competitors, and the current ratio of 0.69 also indicates financial instability. The Altman Z-Score of 1.72 indicates that the company could be in danger of bankruptcy within the next two years, though it has survived trading at lower scores in the past.

The operating margin of 0.57% is low, and net income was in the negatives for fiscal 2019. However, revenue has been steadily increasing in recent years.

f22f20caee3b05ab52d61edd1e8c016a.png

Treehouse Foods

The fund invested in 119,747 shares of Treehouse foods, which had a 5.43% impact on the equity portfolio. Shares traded at an average price of $43.27 during the quarter.

a72a6ae5876e200c0b0eaa9493f29856.png

Treehouse Foods is a multinational food processing company based in Oak Brook, Illinois. Founded in 2005, the company consists of acquired private label packaged food operations.

On April 13, shares of Treehouse Foods traded around $42.35 for a market cap of $2.38 billion. The company has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 5 out of 10.

The interest coverage of 1.5 is lower than 86.56% of competitors, while the cash-debt ratio of 0.09 is also on the low side. The current ratio of 1.5 suggests that the company has enough liquidity to pay short-term debts, though the Altman Z-Score of 1.29 indicates that it may be at risk of bankruptcy.

dbb28ec5703b22bc1f8163453169054f.png

The operating margin of 3.36% is lower than 57.41% of competitors. In recent years, revenue has remained around the same levels, while net income has steadily grown.

3c617a9f06577bb5884146dba6f71c44.png

Oshkosh

The fund also made a new investment of 50,581 shares in Oshkosh after selling out of a previous holding in the company in the third quarter of 2017. The trade impacted the equity portfolio by 3.34%. During the quarter, shares traded at an average price of $78.95.

656bb9e8068816ecadd18c007b3edf75.png

Oshkosh is a multinational industrial vehicle company based in Oshkosh, Wisconsin. It manufactures specialty trucks, military vehicles, truck bodies, airport fire apparatuses and access equipment.

On April 13, Oshkosh shares traded around $63.81 for market cap of $4.33 billion and a price-earnings ratio of 8.13. GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. The Peter Lynch chart suggests that the stock is trading below its fair value.

82c31136a1d66abf71870b9f52a95cf1.png

The cash-debt ratio of 0.32 is low for the industry, but the Altman Z-Score of 3.89 and the current ratio of 2.14 indicate that the company is in a strong financial position.

df08f9c99db9e875e03225e7ccb6f212.png

The operating margin is 9.01%, which is above the industry median. Revenue and net income have both increased significantly over the past few years.

c5bfb2ecf3f68ba1afe6506ba12369d5.png

Viper Energy Partners

The fund purchased 292,207 shares of Viper Energy Partners, impacting the equity portfolio by 1.99%. Shares traded at an average price of $18.44 during the quarter.

3608348d5d5b87f8149c32524120a9e8.png

Viper Energy Partners is a variable distribution master limited partnership that operates as a subsidiary of Diamondback Energy Inc. (FANG). It has direct mineral interest ownership in Midland County, which is part of the Permian Basin. It has no direct capex or operating expenditures.

On April 13, shares of Viper Energy Partners traded around $7.79 for a market cap of $1.23 billion and a price-earnings ratio of 9.95. The company has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. According to the Peter Lynch chart, the stock is trading below its fair value.

799163e1caae2cd994d2a25ab0f0a0be.png

The company's cash-debt ratio of 0.01 is lower than 93.18% of competitors, even in the high-debt oil and gas industry. The Altman Z-Score of 1.65 also indicates that it may be in danger of bankruptcy. However, the current ratio of 5.41 indicates that the company's total current assets are significantly higher than its total liabilities.

The operating margin of 64.96% is higher than 96.87% of competitors. While revenue increased in 2019 compared to 2018, net income declined.

d9f29711630b32e08125dcb88ba249c9.png

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.

Read more here:

  • Warren Buffett on Investing With Negative Interest Rates
  • 3 Financially Strong Oil Companies to Consider as Price War Ends
  • Wells Fargo Could Catch a Break as Asset Cap Is Lifted



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.