Steven Romick (Trades, Portfolio) recently released the third-quarter 2020 portfolio update for the FPA Crescent Fund. The quarter ended on Sept. 30.
The FPA Crescent Fund operates under First Pacific Advisors (Trades, Portfolio) and is managed by Romick, Brian A. Selmo and Mark Landecker. The fund's objective is to seek returns with less risk than the market while avoiding permanent loss of capital. Its strategy combines deep research with a focus on strong fundamentals, attractive risk-reward and diversification across geographies, market caps, sectors and capital structure.
The fund made one new buy for the quarter, McDermott International Ltd. (MCDIF, Financial). It also sold out of Otis Worldwide Corp. (OTIS, Financial), cut its position in its second-largest holding Broadcom Inc. (AVGO, Financial) and bought to cover several short positions.
McDermott International
The FPA Crescent Fund established a new position of 14,118,980 shares in McDermott International, impacting the equity portfolio by 0.21%. During the quarter, shares traded for an average price of $2.85.
Based in Houston, McDermott is a multinational company that provides engineering, procurement, construction and installation solutions to the energy industry. It operates in the Americas, the Middle East, the Caspian Sea and the Pacific Rim.
McDermott definitely falls under the category of "special situations" at the moment. The embattled energy company filed for Chapter 11 bankruptcy in early 2020 and was delisted from the New York Stock Exchange on Feb. 17. It now trades on the over-the-counter market. The company emerged from bankruptcy on June 30 having eliminated $4.6 billion in debt. It also sold its Lummus Technology business for $2.72 billion to repay its debtor-in-possession financing and emergence costs, as well as to put cash on its balance sheet.
On Oct. 14, shares of McDermott traded around $1.85 apiece. After the stock emerged from bankruptcy, the price shot up to $3.75 in late July before dropping 50% to the current level.
Otis Worldwide
The fund sold out of its 870,269- share position in Otis Worldwide, which had a -0.72% impact on the equity portfolio. Shares traded for an average price of $61.10 during the quarter.
Otis is one of the leading global names in the elevators business. With a 160-year history and a position as the number one name in elevator safety brakes, the parent company expects Otis to perform better as an independent company that it could as part of a larger conglomerate.
On Oct. 14, shares of Otis traded around $65.77 for a market cap of $28.54 billion and a price-earnings ratio of 29.16. The stock has gained 44% since its spinoff from Raytheon Technologies (RTX) in March.
GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 2.58 and interest coverage ratio of 46.51 indicate a strong balance sheet position. The operating margin of 13.83 and net margin of 8.51 are higher than 75% of other companies in the industrial products industry; the net margin has improved recently, while the operating margin declined slightly.
Broadcom
The fund cut its holding in Broadcom, its second-largest position, by 22.48%, or 219,964 shares. The trade had a -1% impact on the equity portfolio. During the quarter, shares traded for an average price of $335.08.
Broadcom is a designer, developer, manufacturer and global supplier of a range of semiconductor and infrastructure software products primarily for data center, networking, software, broadband, wireless, storage and industrial markets. It is based in San Jose, California.
On Oct. 14, shares of Broadcom traded around $382.55 for a market cap of $154.16 billion and a price-earnings ratio of 71.49. According to the GuruFocus Value chart, the stock is modestly overvalued.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 9 out of 10. While the cash-debt ratio of 0.2 is lower than 88.21% of competitors, the Altman Z-Score of 2.22 indicates that the company is not at high risk of bankruptcy issues within the next two years. The return on invested capital is currently higher than the weighted average cost of capital, indicating the company is creating value.
Covering short positions
The FPA Crescent Fund also partially covered its short positions for the SELECT SECTOR SPDR (XLF, Financial) exchange-traded fund, SoftBank Corp. (TSE:9434, Financial) and W.W. Grainger Inc. (GWW, Financial).
This ETF represents the financial stocks trading on the S&P 500. The XLF ETF short position was established in the first quarter of 2020 and is worth -5,206,957 shares. During the third quarter, the fund bought 1,798,546 shares of the ETF to cover downside risk. The trade had a 1.72% impact on the equity portfolio, as shares traded for an average price of $24.32 during the period.
The fund established a short position in Japanese multinational holding company SoftBank in the first quarter of 2020. Worth -1,522,000 shares, the position is now covered by 437,269 shares bought in the third quarter and 78,841 shares bought in the second quarter. This quarter's trade had a 0.27% impact on the equity portfolio, as shares traded for an average price of 1,386.61 Japanese yen ($13.19) during the period.
Lastly, the fund increased the coverage on its short position in industrial supply company W.W. Grainger by 6,712 shares. This short position was originally established in the fourth quarter of 2014 and was worth -96,000 shares at the time, but it has since been covered to a net short position of only -6,713 shares.
Portfolio overview
As of the quarter's end, the fund consisted of 51 common stock positions valued at $6.63 billion. The top holdings were Comcast Corp. (CMCSA, Financial) with 5.13% of the equity portfolio, Broadcom with 4.17% and American International Group Inc. (AIG, Financial) with 4.05%.
In terms of sector weighting, the fund was most invested in communication services, financial services and technology.
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. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.
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