Our best performers for the quarter were H&R Block (HRB) and Federal Express (FDX), both returning 24%. Block was among many high-yield stocks that performed well, while FedEx benefited from reduced fears of a double dip and a greater-than-expected increase in Christmas shopping via the Internet. Our worst performer – and the only one that the Fund lost money on – was oil and gas producer Newfield Exploration (NFX), down 5%. Newfield announced a shortfall in its 2011 production due to its decision to shift capital away from an overcrowded basin to other opportunities with higher long-term returns. We believe Newfield’s actions were warranted and, therefore, we used its price decline to add to our position. We eliminated one holding, Bristol Myers-Squibb (BMY), and used the proceeds to acquire TRW Automotive. Bristol was a good long-term holding for the Fund, providing both capital appreciation and an above-average annual dividend. Last year, that dividend attracted the interest of yield-hungry investors and made it one of the Fund's best performers. Rather than paying a dividend, TRW has been using its cash flow to pay off debt. We consider debt repayment and share repurchase to be just as valuable to shareholders as a dividend, but currently dividends are more in favor. In July, TRW’s price was more than twice that of Bristol, but when concerns grew about a cyclical downturn in Europe, TRW stock fell sharply. During the past quarter, Bristol’s stock price exceeded TRW’s price. In our estimate, TRW shares are worth a lot more than their $33 price. We forecast that TRW’s EPS will exceed $7 within a couple of years, and with its debt paid down, the company will soon put that cash to work to reduce its share base, further increasing EPS.
As we stated in the opening letter, 2011 did not produce the attractive stock market returns that we expected. We do believe, however, that business values increased more than stock prices, so we begin 2012 enthusiastic that stocks are now priced at an even larger discount to our value estimates.
We thank you for your patience and, as always, for your investment in the Fund.
William C. Nygren, CFA
Henry R. Berghoef, CFA