Robert Rodríguez weathers the stock market

Robert Rodriguez likes to buy stocks at their lows. When not enough stocks hit new lows, he closes his fund and hoards cash. This is what he’s been up to lately. His moves deserve attention for good reason, his $1.7 billion FPA equity fund has averaged a total annual return of more than 17% over the past 20 years, net of sales charges, easily beating all benchmarks by wide margins.

As Robert Rodriguez finds small gains in the stock market, his focus has shifted to capital preservation. The cash position in his fund has been steadily increasing. On March 31, 2005, it is at 34%. For reference, between 1984 and 1997, its cash level rarely exceeded 5% and most of the time it was less than 2%. He now he’s sitting on this big chest of cash, waiting for opportunities. “You never know the value of liquidity until you need it and you don’t have it.” He said: “This is one of those times where it takes a lot of patience, discipline and conviction to hold such a contrarian position, because of the potential investment and business risk involved.”

The opposite position of Robert Rodríguez in terms of investment goes beyond adjusting the level of cash. He also reduces the fund’s weighting of his in sectors or industries that he believes are overvalued. He has done this before. The years of 1979 -1981 was the time of the second oil crisis, the prices of oil and gas skyrocketed. Many “experts” predicted oil prices of $100 a barrel ten years from now. Energy stocks were valued as growth stocks and accounted for nearly 31% of the S&P 500 market capitalization. Robert Rodriguez was the opposite; he liquidated all of his energy stocks and bought bonds. The oil mania resulted in large-scale capital destruction with virtually every bank in the state of Texas failing in 1987.

Robert Rodriguez’s contrarian investing style was put to the test again during the peak of the tech bubble. In March 2000, he analyzed the operating and stock market performance of Microsoft and Cisco Systems, and made growth assumptions for them and the US economy. He skewed the expected growth and valuation assumptions for each of these companies downward. The result was that Microsoft’s market valuation would rise 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 chances 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 do you like or dislike right now? It has energy values ​​at 19.3% of the Fund, it is between three and four times the weighting of the different indices. This is the highest power allocation it has had since 1979, when it began selling this sector. Financial services shares add 2.1%; the lowest allowance it has had in 35 years. His reason: The financial sector has record or near-record representation in all major indices. Financial services companies account for nearly 21% of the S&P 500 market capitalization, a 33-year high. They are also among the largest components of other stock indices. In terms of operating profit, they comprise nearly 28% of the S&P 500.

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

Focus on market leadership or niche companies that are in industries that are perceived as underserved and unloved – a bottom-up strategy.

Select companies that have strong balance sheets, typically with total debt to total equity of less than 40%.

They must have a significant valuation discount with respect to the market and their historical valuation parameters.

Buy them at modest premiums to book value and less than 1x income.

They must be on or close to being on the new low list.

Have a long-term investment time frame, typically three to five years.