Steven Romick Publishes Quarterly Letter, Commenting on Blue-Chips: BUD, AON, WMT, JNJ

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Sep 04, 2010
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Steven Romick published quarterly letter for the quarter that ended on June 30, 2010. For the first half, his FPA Crescent Fund declined 1.9% for the six-month period, versus the S&P 500ā€™s 6.7% drop. For the past 10 years, Crescent made an average of 11.0% per year whereas S&P 500 returned -1.6% per year. Since inception of 1993, the fund returned 10.6% per year and S&P 500 returned 7.0%.


Romick is very flexible in his investment approach: common shares (both long and short), bond, a large position in cash; As of the quarter's end, the fund is "conservatively postured": equity exposure long position is 45.3% and short position is 4.9%; corporate bond takes up 26.7% and mortgages 2.6%. As much as 26.7% is cash.


Obviously, right now Romick is rather bearish toward the economy and the way Fed policy makers are handling the economy. In the letter, he included a long list of hurdles that the economy is trying to clear:
ā€¢ The eventual end of stimulus funds.

ā€¢ As many people are no longer able to live rent-free in bank-owned homes and have to once again pay forshelter, we expect a trickle-down effect of reined-in consumer spending.

ā€¢ Higher taxes.

ā€¢ A housing recovery that remains in the distant future, leaving mortgage holders with negligible equity

in their homes.

ā€¢ A difficult job market, characterized by persistent unemployment and underemployment and a growingbut-invisible segment of ā€˜disenfranchisedā€™ workers who arenā€™t counted because they have given up jobhunting. Meanwhile, job growth is decelerating.

ā€¢ The end of unemployment insurance benefits for many out-of-work Americans. Average weeks

unemployed have now reached 35.2, exceeding the post WW II high of 21.2 weeks in 1983.4

ā€¢ Continued consumer deleveraging.

ā€¢ Little to no lending from banks, coupled with anemic borrowing from customers (either due to lack of desire or lack of qualification).

ā€¢ High debt loads weighing down state and local governments.

Despite being so negative, the money manager found " the best opportunities ā€” on both a relative and absolute basis ā€” amongst 'Blue Chip' stocks." He thinks the blue-chips not only offers appealing valuations, the big companies also offers greater exposure to international markets that are growing faster than many more domestically oriented companies.


Romick uses Anheuser-Bush Inbev NV (BUD, Financial) as an example to illustrated his point:
An excellent example of a large multi-national with better opportunities abroad would be Anheuser-Busch Inbev NV (BUD), the worldā€™s largest beer company, in which we established a position early in the quarter. In addition to being the largest brewer in the United States, BUD also has a leading presence in many of the worldā€™s most important beer markets, including Brazil, Canada, and the United Kingdom. The company has fantastic cash generative characteristics, world-class brands, a top management team, and the valuation at our purchase price is, at worst, reasonable ā€” and if all goes well, perhaps exceptional. We believe the same can be said for the other ā€œblue chipā€ stocks we currently hold, including Aon, Wal-Mart, and Johnson & Johnson, to name but a few. To gain a better perspective of the type of executives we prefer to act as stewards for our invested capital, we suggest you view BUD CEO Carlos Britoā€™s 2008 talk at Stanford Universityā€™s business school.14 Mr. Brito, who we had the pleasure of meeting recently, expounds for almost an hour on the characteristics of a great business leader and how to foster success among a companyā€™s workforce. We assure you itā€™s worth the time.


Read his complete letter here:


FPA_CrescentJune 30, 2010


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