Two Biggest Positions of a Deep Value Mutual Fund

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Barron’s featured a new deep value fund with $385 million in assets under management. According to Morningstar, this fund has gained 19.5% in 2012, while the S&P 500 moved up 16%. Since the beginning of the year, while the S&P 500 increased 10.61%, the fund returned 12.5%. This fund is known as GoodHaven, managed by two investment managers, Larry Pitkowsky and Keith Trauner, who had worked for Bruce Berkowitz in his Fairholme fund.

Their ex-employer invested heavily in Financials

Bruce Berkowitz runs quite a concentrated portfolio. He invested heavily in Financials, including American International Group (NYSE: AIG), accounting for 43.6% of Berkowitz’s total portfolio. He concentrated a great deal on AIG, as he believed that a business like AIG should be trading at a multiple of book value. At the current price of around $39 per share, AIG is trading at only 60% of its current book value.

Moreover, AIG has been active in quitting its non-core businesses by selling Asian life insurer AIA and a 90% stake in IFLC, an aircraft leasing business. Berkowitz mentioned that AIG should be worth at least $70 per share. GoodHaven also runs a concentrated portfolio, but not as concentrated as Fairholme. Its two biggest holdings are Spectrum Brands (NYSE: SPB) and Hewlett-Packard (NYSE: HPQ).

GoodHaven's top position

GoodHaven owned around 546,000 shares of Spectrum Brands, accounting for 11.68% of its total portfolio. Spectrum Brands Holdings is a diversified global branded consumer products company, producing and distributing herbicides, insecticides, specialty pet supplies, other small household appliances, and personal care products, selling to around 140 countries.

The company has three main business segments: Global Batteries & Appliances, Global Pet Supplies, and Home and Garden Business. The majority of its revenue, $2.25 billion, or 69.2% of total 2012 revenue, was generated from the Global Batteries & Appliances segment. Global Pet Supplies ranked second with $615.5 million in sales, while Home and Garden contributed around $397 million in revenue in 2012.

Spectrum Brands is a cash cow, with a consistent positive cash flow. Its operating cash flow increased from $227 million in 2011 to $255 million in 2012, while free cash flow rose from $191 million to $208 million during the past year. Even though Pitkowsky and Trauner thought that Spectrum Brands could reach more than $75 per share in two or three years, I do not believe Spectrum is a bargain now. At $57 per share, this $3 billion business is valued at as high as 13.5 times EV/EBITDA.

Bullish about Hewlett-Packard

Hewlett-Packard is the second biggest position in GoodHaven's portfolio, representing around 8.34% of its total holdings. Hewlett-Packard has declined substantially, from $29 per share in February 2012 to around $11 per share in November 2012. The significant decline in the company’s stock price was due to an overall decline in the PC industry and the huge $8.8 billion write-off of Autonomy, one of its biggest acquisitions. However, since the beginning of the year, the company has gained as much as 47%.

Trauner commented that the reason he invested in Hewlett-Packard was because its enterprise customers were quite sticky. He said: “When you have IT setups where changes affect thousands of devices, you don't make changes quickly.” At around $22 per share, Hewlett-Packard is worth around $42.9 billion on the market. The market seems to value Hewlett-Packard cheaply, at only 4.32 times EV/EBITDA. On Dec. 19, I wrote that investors could pick up Hewlett-Packard shares on the cheap, and consider the company as an opportunistic stock.

My Foolish take

I think that both Spectrum Brands and Hewlett-Packard are no longer attractive at their current price. Spectrum Brands already has a rich valuation of a double-digit EV multiple. Hewlett-Packard is valued cheaply in terms of EV multiple. However, it still has as much as $35 billion in goodwill and intangible assets, which could be wiped out anytime. Thus, the risk is still there for Hewlett-Packard’s shareholders.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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