Robert Rodriguez Weathers the Stock Market

Robert Rodriguez likes to buy stocks at their lows. When there are not enough stocks hitting new lows, he closes his fund and piles up cash. This is what he has been doing lately. His moves deserve attention for good reasons, his $1.7 billion FPA Capital Fund has averaged an annual total return of more than 17% over the last 20 years, net of sales charge, handily beating all the benchmarks by wide margins.

As Robert Rodriguez finds slim pickings in the stock market, his goal has changed to capital preservation. The cash position in his fund has been in steady increase. On March 31, 2005 , it is at 34%. As a reference, between 1984 and 1997, his cash level was rarely above 5% and most of the time it was less than 2%. Now he is sitting on this big trunk of cash, awaiting opportunities. "You never know the value of liquidity until you need it and don't have it." He said, "This is one of those times when it takes a great deal of patience, discipline, and conviction to maintain such a contrarian position, because of the potential business and investment risk that it entails."

Robert Rodriguez' contrarian position in investment goes beyond adjusting the level of cash. He also reduces his fund's weighting in the sectors or industries that he thinks are overpriced. He has done this before. The years of 1979 ?1981 was the time of the second oil crisis, oil and gas prices were soaring. Many "experts" were forecasting oil prices of $100 per barrel within ten years. Energy stocks were being valued as growth stocks and represented nearly 31% of the S&P 500's market capitalization. Robert Rodriguez went to the contrary; he liquidated all his energy stocks and bought bonds. The oil mania resulted in large-scale capital destruction with virtually every bank in the state of Texas going bankrupt by 1987.

Robert Rodriguez's contrarian investment style was tested again during the peak of the tech bubble. In March 2000, he analyzed the operating and stock market performances of Microsoft and Cisco Systems, made growth assumptions for them and the U.S. economy. He biased down the expected growth and valuation assumptions for each of these companies. The result was that Microsoft's market valuation would increase to 36% of nominal GDP. Cisco's expected market valuation would rise to 48% of nominal GDP. The combination of these two estimates would equal 84% of GDP by 2010. Apparently (now) the odds of this happening were not great. In light of these trends, he reduced his Fund's exposure to technology stocks. We all know how that bubble ended.

So what sectors does he like or dislike right now? He has energy stocks at 19.3% of the Fund, it is between three and four times the weighting of the various indexes. This is the highest energy allocation that he has had since 1979, when he began selling this sector. Financial service stocks total 2.1%; the lowest allocation he has had in 35 years. His reason: financial sector is at or near-record representation in all the major indexes. Financial service companies represent nearly 21% of the S&P 500's market capitalization -- a 33-year high. They are among the largest components in other stock indexes as well. In terms of operating profits, they comprise almost 28% of the S&P 500.

In summarizing his contrarian investment style, Robert Rodriguez listed these key attributes:

Focus on market leadership or niche companies that are in industries that are perceived to be out of favor and unloved - a bottom-up strategy. Select companies that have strong balance sheets - typically with total debt to total capital of less than 40%.

They must be at a significant valuation discount to the market and its historical valuation parameters.

Acquire them at modest premiums to book value and at less than 1x revenues. They should be on or close to being on the new low list. Have a long-term investment time frame - typically three to five years.

Dr. Charlie Tian, Director of Research of http://gurufocus.com, the website that tracks the stock picks of Warren Buffett, George Soros and other guru investors like Bill Nygren, Mason Hawkins, Ken Fisher, David Dreman, Martin Whitman, James Gipson, Robert Rodriguez, Ronald Muhlenkamp, Wallace Weitz, William, Ruane, Edward Lampert, Edward Owens, Richard Aster, Jr, Robert Olstein, John Keeley, Brian Rogers and Tweedy, Browne.

---

Maximizing a Stock Market Investment

Maximizing a stock market investmentThere are several factors an investor... Read More

Stealth Bull

If you have been watching the stock market at all... Read More

Stocks & Oil, Sat Jun 18th, 2005

Both the stock market and oil prices rallied recently, which... Read More

Hill of Hope

Just about now everyone is confused as to which way... Read More

Advantages and Disadvantages of Mutual Funds

Outlined below are some of the advantages and disadvantages of... Read More

Laws and Efficiencies and Theories of Diminishing Returns

The basis of diminishing return discussions surround such simple notions;... Read More

Keep Your Profits

It looks like we have now entered a new bull... Read More

Look Out The Window

Quick, look out the window. It's raining. No, the sun's... Read More

A Personal Stock Market Investment Philosophy

∙ Make every investment in the stock market a long-term... Read More

Economists #2

Economists know more about how the fragments of society work... Read More

What Are You Waiting For?

Do you own any mutual funds? In an IRA or... Read More

Zero Sum Game

Most people think the stock market is a zero sum... Read More

My Stock - Right or Wrong

We all know the expression, "My country, right or wrong",... Read More

Investing in the Stock Market

From the book 'The Stockopoly Plan' by the author Charles... Read More

Trend Trading - Trading Stocks Using Technical Analysis and Swing Trading Strategies

Peter is a professional trader, Paul is not. Peter has... Read More

Stock Options Trading Strategies - Lean

Professional stock options traders use the term lean to refer... Read More

NASDAQ 800?

In November of 2000 when the NASDAQ was trading at... Read More

Pension Plans

If you have a pension plan at work you will... Read More

Patterns

The Law of Chaos is the theory of random unpredictable... Read More

Shadow Bull

As one of my regular readers you know I have... Read More

Investment Attorneys and Garbage Stocks

How is it possible that trash Companies are posting less... Read More

Why Technical Indicators

The fight continues to rage among traders who use technical... Read More

Fake Money

Reach in your pocket and take out that big roll... Read More

Stuff

I continually hear from economists, talking heads, other market letter... Read More

Duct Tape

Did you run out to buy that duct tape yet?... Read More

Low Tide

When you stand on the ocean shore and watch the... Read More

Complacency Indicator

If you haven't heard of the technical indicator with the... Read More

Again With the Bubbles?

A few years back ? it seems like an eternity... Read More

Kick The Tires

Before you buy another car you walk around the lot,... Read More

Evaluation II

As I said in Part I everyone in the insane... Read More

Trading vs Investing

I often hear from people, "I don't trade. I invest.... Read More

Leverage - Margin Debt

What is leverage?Here is a definition of leverage from an... Read More

Swing Trading Strategies

Using Swing Trading Strategies and Technical Analysis when Trading Stocks... Read More