During the third quarter, Francis Chou (Trades, Portfolio) of Chou Associates Management made only two adjustments to the Associates Fund portfolio — both companies are spin-offs of Sears Holdings (SHLD, Financial) whose insiders are purchasing the stock.
Chou began investing as a 25-year-old when he pooled an initial investment of $51,000 from coworkers and his own funds. What makes this story unique, however, is Chou and his coworkers were telephone repairmen with Bell Canada.
Since the formation of that investing club in 1981, Chou founded Chou Associates Management, which oversees five mutual funds. The flagship Associates Fund returned 41.33% last year compared to the S&P 500’s 31.55%.
Chou was introduced to the value investing model when he read Ben Graham’s influential and bestselling book Security Analysis.
“I was working at Bell Canada as a technician. I wanted to change that so I was reading a lot, trying to find out what field to go into next,” Chou said in an interview with Morningstar. “Once I read Security Analysis I knew I wanted to be a portfolio manager.”
What sets Chou apart from his peers is his practice of refunding fees to his clients when the fund underperforms.
The five funds combined have about $1 billion in assets under management. The Associates Fund holds 25 stocks with about $395 million in assets under management.
New buy
Chou purchased 890,170 shares of Sears Hometown & Outlet Stores (SHOS, Financial) at an average price of $18.87 per share.
Sears Hometown & Outlet spun off from its parent company Sears Holdings (SHLD, Financial) in October 2012. Sears Hometown operates in three segments: Sears Hometown Stores, Sears Hardware Stores, and Sears Appliance Showrooms.
Year-to-date, the stock has declined 43%, and may still be overvalued when compared to the Peter Lynch earnings line.
Diluted EPS for the trailing 12 months is $0.80, and declined from $2.60 in FY 2013 to $1.55 in FY 2014.
One positive indicator is all insider transactions since March 2013 have been purchases of the stock. Edward Lampert (Trades, Portfolio), a 10% owner, purchased more than 200,000 shares over two occasions in April and June.
Reduce
Chou sold 90,001 shares of Lands’ End (LE, Financial) at an average price of $37 per share, leaving a total of 151,696 shares. Chou had purchased the shares the previous quarter for an average of $28.48 per share.
Lands’ End spun off from Sears Holding in April. The company is an American lifestyle brand that produces casual clothing, accessories, footwear, and home products.
Lands’ End executives have also been purchasing the company’s stock, the most recent of which were on Oct. 1 and 2.
The company’s operating margin improved from 5.17% in FY 2013 to 8.21% in FY 2014. Its P/S ratio is 2.3.
