Sometimes betting big on one name, or sector, is a strategy that can pay off in the long run. For Schwartz Investment Counsel, taking a gamble on oil stocks, and little-known Texas Pacific Land Corp. , helped the firm’s Schwartz Value Focused Fund ( RCMFX ) fund beat the odds in 2022 and surge more than 20% while the broader market took a beating. Part of that strategy hinges on finding names with high profit margins, high returns and those trading below their intrinsic value, explained Chief Investment Officer Tim Schwartz, who manages the midcap blend fund with his father and CEO George Schwartz. The fund isn’t tied to any index, nor does Schwartz try to mimic a specific sector weighting. Since 2016, it hasn’t claimed to be diversified. About 40% of the fund’s investments today are in energy, Schwartz said, with no bets on the consumer defensive and utilities sectors, according to Morningstar data. “We feel that if you want to outperform the average and outperform the index, you’ve got to look different than the index,” he said of the fund. A family focus Since opening in 1980 in Plymouth, Michigan, Schwartz Investment Counsel has blossomed into a 22-employee business with a satellite office in Florida managed by Tim Schwartz. The firm manages about $3 billion in assets, the majority of which is in the firm’s Ave Maria Mutual Funds, geared toward high net worth individuals and Catholic institutions, with a focus on investing in companies supporting Catholic principles, Schwartz explained. In the more than four-decades since its launch, Schwartz and his siblings have joined their father in the business, serving in a range of different roles. A big bet on energy stocks Key to RCMFX’s recent success is its sizeable bet on energy stocks and Texas Pacific Land, which accounted for almost 28% of the $55 million portfolio at the end of November, according to Morningstar. Why make such a large bet on one stock? Schwartz’s history in Texas Pacific Land dates back to 2016. Then a trust, many people steered clear of the large Texas land owner, which owns land often used for oil and gas drilling, and traded at around $150 a share. But sentiment shifted in 2020, when the company announced plans to become a corporation, Schwartz said. Following the announcement, shares took off, surging more than 500% since approval of the reorganization plans broke. Last year alone the stock soared nearly 88%. TPL 5Y mountain Texas Pacific Land has surged more than 500% since approving plans to become a corporation Schwartz’s bet on Texas Pacific Land rests on its high margins, after-tax operating margins, and, more importantly, the “pure profit” royalties it gains when traditional oil companies drill, he said. “We’re gonna own it for the next 5, 10, 20 years,” Schwartz said. “We think it’s just an exceptional company, extremely unique, and a company that we want to own for a very long time.” Schwartz’s bet on energy extends to a more traditional stake in Chevron , (4.3% of the fund) which he calls a premiere integrated oil and gas company. The fund has slightly smaller positions in companies with higher volatility but solid management teams, such as Pioneer Natural Resources (2.74%) and Devon Energy (2.65%). SLB , the former Schlumberger, accounted for 3% of the portfolio, according to Morningstar. Energy’s been on a tear in recent months amid the higher prices ushered in by the war in Ukraine. But Schwartz started accumulating energy stocks well before the latest rally, when crude oil plummeted during the pandemic. Schwartz expected only temporary declines in oil prices, viewing the slump as a chance to purchase companies with solid fundamentals and room to run. More than two years later, that approach has paid off handsomely. Looking outside of energy Along with energy, Schwartz finds value in the financial sector, making up more than 16% of the portfolio’s holdings, according to Morningstar, with sizeable bets on Intercontinental Exchange (5.11%) and CME Group (3.55%). Both stocks fell at least 25% in 2022, but Schwartz expects the exchanges to benefit from heightened commodity market volatility, high inflation and improved trading activity. Schwartz also recently began buying shares of luxury home furnishings retailer RH , which was battered in 2022, plummeting 50% and finishing the year about 64% off its all-time high. Shares bounced back somewhat in the third and fourth quarters, gaining 15.9% and 8.6%, respectively. The sharp decline in share price initially piqued Schwartz’s interest in the company, formerly known as Restoration Hardware, now making up about 5% of the fund. He viewed the 2022 decline as a one-of-a-kind opportunity to buy a well-run retail franchise, and Berkshire Hathaway’s stake in the company, now at 10%, only endorsed his view. “A lot of people had thrown in the towel and it was out of favor, and so those are the kinds of opportunities that we’re always on the lookout for,” he said. Looking ahead, Schwartz remains optimistic about his stock-picking perspective, even though many 2022 problems, including inflation and Federal Reserve monetary policy, will continue to dominate the 2023 landscape. “We’re not too concerned about the macro picture,” Schwartz said. “We consider it, but we’re more more focused on doing a bottom up analysis on companies, and we think the companies that we own are going to benefit regardless of the macro environment.” The fund holds almost 17% of assets in cash, charges an adjusted expense ratio of 1.25% and is rated four stars by Morningstar. Schwartz Value returned 21.3% annually over the past three years and 13.15% a year over the past five, landing it in the top 1% percentile among similar funds.
view original post