Because our March-end Covered Call Corner screen listed companies with relatively high stock prices – making it difficult for investors with smaller portfolios to participate – we are rescreening with the stocks owned by Richard Pzena of the Hancock Classic Value (PZFVX).
We have selected the top ten stocks that this fund reported purchasing in the first quarter of 2017, and have limited the list based on two criteria:
- Stocks listed represented more than 2% of the portfolio’s value
- Stocks listed had been bought by the fund in the reported quarter
These conditions were to screen for the stocks in which the managers had demonstrated the most confidence (by portfolio weight) and about which they had made an active decision to invest. As we explain in our video introduction to “Bond Replacement” investments, we are using these portfolio managers’ actions as an indication of undervaluation.
After looking over Pzena’s record, we were thinking of moving on to another manager. Longer-term, this fund has underperformed the S&P 500 pretty handily (see figure 2 below). However, a few things caught our eye when we were researching the fund. First, the CIO, Richard Pzena, had been the Sanford Bernstein oil analyst years ago, and several of the prominent purchases included oil majors. Especially Pzena’s position in Exxon Mobil (XOM), which he more than doubled in the first quarter. Take this for what it’s worth – the guy knows a lot about the energy business, but as Ra’uf pointed out in an Office Hour session, Exxon’s revenues and OCP have been falling for years while the price has climbed. Since 2005, Exxon’s price us up 36% while revenues have dropped by 28% and OCP by 102%.
Perhaps Pzena is making a temporary bet on the supply-demand balance for oil and natural gas, but it is hard to imagine that Exxon Mobil is particularly undervalued, judging by figure 1.
The other thing that caught my eye was the name of Bruce Greenwald, who is on Pzena’s board of directors. Greenwald is an extremely influential guy in the value investing world, so seeing his name associated with this fund stood out to me.
In terms of historical fund performance, over a 10-year period, the results are pretty disappointing.
The performance over a five year span is almost equal (disregarding fees…), but the firm has outperformed the index over the last year.
Obviously, our featuring of this manager’s asset selection is tempered by the issues mentioned above, but on the bright side, the Effective Buy Prices for all stocks are below that of the price reported paid by Pzena in 1Q 2017.
One of the stocks that caught my eye when looking through the list was Cognizant Technical Solutions (CTSH). Look at how different revenue, OCP, and price data look for Cognizant versus Exxon:
Please reach out if you have any questions about this spreadsheet!