FPA Capital Fund, Inc.
December 31, 2012
The FPA Capital Fund outperformed its benchmark the Russell 2000 for the 4
quarter of 2012 yetunderperformed for the year. The combination of our large cash position and our large exposure to energy go
a long way to explain this short term differential. Our energy stocks outperformed the benchmark’s energy
exposure by roughly 7-8% for the year. However, our large weighting in energy at 30% vs. 6% for the
benchmark was a hindrance to overall performance, with the benchmark’s energy stocks lagging the market
by 20% for the year.Energy, which is broken down into oil service and exploration and production, continues to be the largest
area of the portfolio despite us reducing several positions during the year. We have sold the lion’s share of the
significant investments made back in late 2008 and early 2009. Since the second quarter of 2009, FPA CapitalFund has taken approximately $400 million in profit on an original $359 million invested. In other words, wehave taken around 111% of the original amount invested off the table. Despite this selling, we still retain mostof our initial investment in the energy sector. We continue to have conviction in our energy holdings, whichare now primarily oil focused. Oil is a global commodity that has a heavy exposure to global-demand growthand in particular that of the developing economies. We believe growth in the developing economies willexceed that of developed ones and oil will be one of the beneficiaries of this. Oil production also has a sharpdecline curve, roughly 9% according to the International Energy Agency, which makes it difficult to grow supply. Importantly, this high decline rate not only enhances the upside, but also potentially helps protect theinvestments in a recessionary environment, since supply and demand get back into equilibrium much faster.Lastly and most imperative, oil in the ground and assets used to produce it, should provide a store of valueagainst potential future monetary inflation.
Industrials and technology companies drove most of our outperformance in the quarter. Our industrials wereup approximately 15% and our technology companies 10% versus 10% and 2% for the respective sectorconstituents in the benchmark. The top five contributors in the quarter were Trinity Industries, Arrow Electronics, Western Digital, ENSCO, and Interdigital.
The bottom 5 performers, of which four were energy companies as discussed above, were Rowan Companies, Newfield Exploration, Rosetta Resources, FootLocker and Baker Hughes.During the year we continued to trim positions as they got close to or exceeded our fair value estimates. Wetrimmed about half of the portfolio stocks during the year including five energy investments, threetechnology investments and both our retailers. We also added to five existing positions during the year,Devry, Interdigital, Newfield Exploration, Patterson-UTI Energy and Veeco Instruments. Patterson-UTI, which we had sold at higher prices, came down to 75% of book value
, around 3x trailing cash flow
andclose to half its replacement value of primarily new equipment, at which time we began repurchasing thestock. We also initiated a new position in the defense industry.During 2012, the following investments went up by more than 15% in value: Amerigroup, VeecoInstruments, Oshkosh, ARRIS Group, Western Digital, Foot Locker, Federated Investors, Cabot Oil & Gas,Reliance Steel & Aluminum, ENSCO, Signet Jewelers, Trinity Industries and Atwood Oceanics. As you cansee, our winners included companies from 7 industries. Some of these investments have been a part of theFund for many years and some were brand new positions initiated in the past two years. Of the above, Veeco
As measured by the S&P 500.
For a complete list of the portfolio’s holdings refer to pg. 8
Book value is the value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulateddepreciation.
A company's free cash flow for the previous 12 months.