Tag Archives: minerals
Relevance Of Portfolio Holdings: 3 Concentrated Funds To Buy And Sell
In our previous article, we discussed how concentrated mutual funds rely on the limited numbers of stock holdings that they own. Focused funds invest in a limited number of companies, rather than having a diversified portfolio. In this context, we showed how Sequoia Fund (MUTF: SEQUX ), which has slumped nearly 70% since Oct. 18, has learnt a lesson for its nearly 30% exposure to Valeant Pharmaceuticals (NYSE: VRX ). We also spoke of funds such as Fairholme Allocation (MUTF: FAAFX ) and Fidelity Select Computers Portfolio (MUTF: FDCPX ) that have gained on the strong performance of its core holdings. However, both FAAFX and FDCPX had a relatively higher number of total issues in stock holdings. The number of holdings in a portfolio may be considered one of the measures of portfolio risk. A lower number of total issues will indicate that the fund is more concentrated and is thus more vulnerable to fluctuations in these holdings. So, if a fund invests in just five stocks, it is highly susceptible to fluctuations in them. Though northward bound stock holdings brighten the prospects of concentrated funds, the advantage of portfolio diversity is denied. In case of a well-diversified portfolio, losses in some stocks may be offset by gains in others. In addition to the number of holdings in a portfolio, the percentage of assets invested in stocks is also crucial. A fund with the bulk of its assets invested in a particular stock is most likely to be guided by the performance of that stock. This time, let’s look at three Sell-ranked concentrated mutual funds that have total issues in the stock holdings below 30 and have underperformed in recent times. For investors ready to gamble, we will also pick three Buy-ranked concentrated mutual funds that have outperformed broader markets despite holding a limited variety of stocks in its portfolio. 3 Sell-Ranked Concentrated Funds These mutual funds either carry a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) and have total issues in the stock holdings below 30. These funds have underperformed over the year to date and 1-year periods. The minimum initial investment for these funds is below $5000. Fidelity Select Utilities Portfolio (MUTF: FSUTX ) seeks capital growth over the long run. FSUTX invests the lion’s share of its assets in common stocks of companies primarily involved in the utilities sector, and companies that derive the major portion of its revenues from operations related to this sector. FSUTX invests in both U.S. and non-U.S. firms. FSUTX currently carries a Zacks Mutual Fund Rank #5. The number of holdings in FSUTX’s portfolio is 24. FSUTX has lost 11.3% year to date and is down 10.6% over the last 1-year period. FSUTX’s top 3 holdings include NextEra Energy (NYSE: NEE ), Exelon (NYSE: EXC ) and Sempra Energy (NYSE: SRE ) and the fund has invested respectively 15.7%, 12.8% and 10.5% in them. NextEra Energy, Exelon and Sempra Energy have lost 4%, 20.8% and 7.3%, respectively, so far this year. Tocqueville Select (MUTF: TSELX ) invests in a focused number of small and mid-sized domestic companies. TSELX normally invests in a focused group of 30 stocks. A maximum of 25% of its assets may be invested in non-US securities. TSELX currently carries a Zacks Mutual Fund Rank #4. The number of holdings in TSELX’s portfolio is 27. TSELX has lost 10% year to date and is down 8.2% over the 1-year period. TSELX’s top 3 holdings include Web.com Group, j2 Global (NASDAQ: JCOM ) and Minerals Technologies (NYSE: MTX ) and the fund has invested 6.2%, 5% and 4.8% in them, respectively. While Web.com Group and j2 Global have gained respectively 29.6% and 32.4% year to date, Minerals Technologies has lost 12.1%. AMG SouthernSun Small Cap Investor (MUTF: SSSFX ) invests in common stocks of small cap US firms. Market capitalizations of these companies (at the time of purchase) are within the capitalization range of firms listed in the Russell 2000 Index. SSSFX currently carries a Zacks Mutual Fund Rank #5. The number of holdings in SSSFX’s portfolio is 26. SSSFX has lost 12% year to date and is down 15.3% over the 1-year period. SSSFX’s top 3 holdings include AGCO Corp. (NYSE: AGCO ), Darling International (NYSE: DAR ) and Centene Corporation (NYSE: CNC ) and the fund has invested 5.7%, 5.3% and 5.2% in them, respectively. So far this year, while AGCO and Centene have gained a respective 7.5% and 14.5%, Darling International has lost 48.6%. 3 Buy-Ranked Concentrated Funds A counter argument in case of concentrated funds is that well-chosen stock picks that are surging can also translate into significant gains for mutual funds. So, for investors ready to bet, below are 3 mutual funds that either carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) and have total issues in the stock holdings below 30. These funds have garnered decent gains over the year to date and 1-year periods. The minimum initial investment in these funds is below $5000. Davis Financial A (MUTF: RPFGX ) uses Davis Investment Discipline to invest a minimum of 80% of its net assets in securities issued by companies engaged in the financial services sector. These companies own financial services-related assets that are at least 50% of the value of total assets or earn a minimum of 50% of revenues from offering financial services. RPFGX currently carries a Zacks Mutual Fund Rank #2. The number of holdings in RPFGX’s portfolio is 28. RPFGX has gained 3.8% year to date and is up 5.6% over the 1-year period. RPFGX’s top 3 holdings include Wells Fargo & Co. (NYSE: WFC ), Markel Corporation (NYSE: MKL ) and American Express (NYSE: AXP ) and the fund has invested 8.9%, 6.9% and 6.6% in them, respectively. While Wells Fargo and Markel have gained 4.8% and 31.8% respectively year to date, American Express has lost 20.6%. ICON Consumer Staples A (MUTF: ICRAX ) invests most of its assets in equities of companies belonging to the Consumer Staples sector. ICRAX may invest in common stocks and preferred stocks of companies of all sizes. ICRAX currently carries a Zacks Mutual Fund Rank #2. The number of holdings in ICRAX’s portfolio is 23. ICRAX has gained 2.6% year to date and is up 5% over the 1-year period. ICRAX’s top 3 holdings include CVS Health (NYSE: CVS ), Reynolds American (NYSE: RAI ) and Tyson Foods (NYSE: TSN ) and the fund has invested 8.3%, 7.3% and 7% in them, respectively. Year to date, Reynolds American and Tyson Foods have gained 46.7% and 11.7%, while CVS Health has lost 2.5%. Smead Value Investor (MUTF: SMVLX ) keeps roughly 25-30 firms in its portfolio and invests in common stocks of large-cap firms. SMVLX currently carries a Zacks Mutual Fund Rank #2. The number of holdings in SMVLX’s portfolio is 26. SMVLX has gained 4.9% year to date and is up 7.9% over the 1-year period. SMVLX’s top 3 holdings include NVR Inc. (NYSE: NVR ), Amgen (NASDAQ: AMGN ) and Tegna (NYSE: TGNA ) and the fund has invested 6%, 5.9% and 5.8% in them, respectively. NVR, Amgen and Tegna have gained 29.6%, 2.1% and 10.6% respectively year to date. Original Post
Alliance Resource Partners: Circle Of Competence In Action
Summary The concept of a circle of competence is probably more important to avoiding risk than anything else, but it is not discussed enough in context. Coal is obviously hated right now. I can’t think of anything more universally hated. That can mean opportunity. And Alliance’s track record is incredible. Just looking at the financials, you would never guess that this is a commodity company. But I don’t understand the legal/regulatory environment and the price of coal in the Illinois Basin has declined to a point that implies breakeven EBITDA for ARLP. Circle of competence is probably the most important concept in investing for avoiding catastrophic risks. Most people can understand some businesses, but everyone has many businesses they do not understand well enough to touch at any price. Understanding can be changed. You can learn, but that should be done before making investment decisions regarding the businesses you don’t understand. Circle of competence gets a lot of attention among value investors, but still not as much as it deserves, and where it is discussed, it is usually abstract because no one wants to discuss specific things they don’t understand. It’s tough on the ego. That’s exactly what I’m going to try to do here. Coal I don’t understand coal. Alliance Resource Partners LP (NASDAQ: ARLP ) came up on my list of low EV/EBIT stocks. To this point, I’ve been dismissing MLPs entirely, but I decided to give this one a chance. This is important because I’ve never invested in an MLP before, so there’s already a layer of non-understanding here. The MLP issue is not the crux of it. It looks like MLPs are publicly traded limited partnership interests. Only companies in certain industries like commodities can structure as MLPs. They aren’t taxed at the corporate level, and distributions (not “dividends”) are return of capital – they lower your cost basis but are not taxed immediately in most cases. When you sell, your capital gain (hopefully you have a positive total return) is taxed at your ordinary income rate, not at capital gains rate. You should always own MLPs in taxable accounts because they are actually taxed preferentially there compared to in a tax-exempt account like an IRA. Great, so maybe I could own an MLP. But coal is another story. Coal must be one of the most, if not the most, hated industry out there right now. The industry ETF (NYSEARCA: KOL ) is down almost 50% over the last 12 months: (click to enlarge) Environmentalists hate it because it produces more CO2/energy produced than other energy sources. Coal produces 2000 lb of CO2 per ton, while gas (natural gas is its closest competitor) produces 1100 CO2. The government hates it because environmentalists hate it and environmentalists are voters. There are also reasonable negative externalities but I’m trying to be pragmatic. Investors hate it because the stocks have been killed to the point where it’s tough to be an institutional investor and hold anything related to it. Utilities hate it because its controversy is causing them to spend billions converting electric power plants to gas-powered and other energy sources. Kids hate it because it’s what they unwrap on Christmas instead of the things they actually wanted or could do anything with. I may or may not be able to keep going, but you get the point. My insight was that there might be a market prejudice in all this hate and maybe there is opportunity in the pessimism on coal. Alliance in particular looked interesting. Despite being a cyclical, commodity business, the financials look really interesting. Operating income has been positive every year over the last 10 years, and substantially so with OM% never getting below 13%. FCF conversion from EBIT has been about .6x, unheard of in my experience for a commodity business. Book value per share has compounded from 1.68 to 14.16. Revenue has grown every single year. The share count has not been diluted at all… Just unusually fantastic long-term numbers. (click to enlarge) And the stock price has done well long-term: (click to enlarge) There’s a really informative post from Value Investors Club that perfectly laid out the bull case on the stock. It’s quite compelling. The company has been led by Joe Craft since the mid ’90s and he’s been with the company since he left college around 1980. He owns a substantial interest in both the GP and ARLP and is thus properly incentivized. He only takes a salary of $700k/yr. Apparently, ARLP is a low cost producer generating some 95% of its coal in the low-cost Illinois Basin. I don’t know much about commodities, but I know being the low-cost provider is everything in terms of competitive dynamics. ARLP stock now trade at an EV/FY15 est. distributable cash flow of like 4.3x. And a third of that EV is debt. In other words, they could hypothetically pay a ~33% distribution. This all sounds great, except that there are many things I just don’t understand about coal. One is regulation. According to John Huber , there is regulation in the works that could force utilities to move away from coal: Adding to the cyclical woes are the regulatory hurdles that the industry currently faces, and will likely continue to face going forward. The US Supreme Court remanded the EPA s Mercury and Air Toxic Standards on June 29th , which would have cost power plants upwards of $10 billion annually. This was perceived as a victory for the coal industry, but many power plants have already been converting from thermal coal to natural gas in anticipation of regulatory requirements. Who knows what lower courts will decide regarding mercury emissions, but once a plant switches to gas, it’s not going back to coal regardless of price. Then there is the unrelenting decline in coal prices. In the Illinois Basin in particular, coal prices have declined to a point that implies breakeven EBITDA for Alliance: (click to enlarge) Source: Quandl / US Energy Information Administration . I don’t know how their margins will hold up given that. The current 20% operating margin seems unusually high for a commodity company. Maybe ARLP will even lose money this time around. I just can’t get comfortable with this. I’m using too many “maybes.” Even if ARLP is attractive now on an expected value basis, without a great deal of knowledge, there’s no way for me to say with any degree of certainty in the face of declining coal prices that my downside is limited. And that’s a requirement for my portfolio. I may do further work here, but for now coal and ARLP are getting put in the “don’t understand/too hard” pile. Hopefully this not only provides some information about coal and ARLP, but serves as an example of the circle of competence concept in action.