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Better Know a Stock Picker

Tim Beyers
November 24, 2006

Welcome, Fools, to part 26 of our several-thousand-part series, "Better Know a Stock Picker," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, each week I take a look at a fund you may want to own. What's on tap this week?

FPA Capital (FPPTX)

Expense ratio


Fund size

$2.17 billion in assets

1-year return


5-year return


10-year return


Source: First Pacific Advisors, Morningstar

Top 5 holdings


% of Assets

Avnet (NYSE: AVT  )


Ensco International (NYSE: ESV  )


Michaels Stores


Patterson-UTI Energy (Nasdaq: PTEN  )


Big Lots (NYSE: BIG  )


Source: First Pacific Advisors

Meet Bob Rodriguez
The fightin' team at FPA Capital is led by Bob Rodriguez, who was recently named one of Morningstar's 10 best mutual fund managers. That can't be too surprising. Rodriguez runs First Pacific Advisors, the Capital Fund, and the bond-oriented FPA New Income fund (FPNIX); the latter two funds have both easily bested their benchmarks.

But managing FPA Capital has truly earned Rodriguez his reputation. Over the past 15 years, Morningstar reports, his small-value style has returned more than 17% annually. And he's achieved that record without taking undue risks. For example, while hundreds of others were placing big bets on high-flying dot-coms, Rodriguez kept a big pile of cash in the fund and waited for bargains.

That's still his style. In an August interview with Kiplinger's, Rodriguez said that his screening criteria, which generally includes a P/E of 15 or less and a price-to-book ratio of 2 or less, was identifying few new opportunities. Accordingly, FPA Capital's top sector as of Sept. 30 was U.S. government bonds, which accounted for 24% of the portfolio. Talk about guts.

How he invests
Of course, it takes more than courage to produce superlative results; preparation is also key. In that sense, Rodriguez, who is based in Los Angeles, comes off a little like Pete Carroll, the head football coach for the University of Southern California, which also happens to be his undergrad and graduate alma mater.

Consider FPA's investment in craft seller Michaels. Rodriguez told Kiplinger's that he and his managers visited stores, interviewed customers, analyzed distribution centers, and interviewed the firm's new CEO before buying shares. That extraordinary due diligence resulted in a 16-bagger for FPA Capital shareholders as of August. Today, the firm is being bought out for $44 a share, adding still more gains for Rodriguez's clients. Eat that, Wall Street.

How did he know Michaels would be a winner? At the time, Michaels traded cheaply on a price-to-earnings basis, and its clean balance sheet left plenty of working capital with which management could effect a turnaround. Recent FPA purchases that could be cut from a similar mold include homebuilder Champion Enterprises (NYSE: CHB