FPA Capital Urges Extreme Caution, Talks Arrow Electronics (ARW), Avnet (AVT), Others

Rowan Companies PLC (NYSE:RDC)

– Shares Held By FPA Capital Fund (as of September 30): 1.43 Million

Rowan Companies PLC (NYSE:RDC) was a major detractor to The FPA Capital Fund’s performance during the third quarter, with its stock falling by over 14%. However, the fund showed its conviction in the stock during that time by purchasing an extra 222,480 shares of the company. Rowan Companies PLC (NYSE:RDC)’s stock has performed well this month following Donald Trump’s Presidential victory and is now trading down by only 2.6% year-to-date. On November 21, the company announced that it is forming a 50-50 joint venture with with Saudi Aramco to own, operate and manage offshore drilling rigs in Saudi Arabia. Analysts see this as a positive development for the company and expect the stock do well in the long-term.

Arrow Electronics, Inc. (NYSE:ARW)

– Shares Held By FPA Capital Fund (as of September 30): 305,293

Arrow Electronics, Inc. (NYSE:ARW) has been a part of FPA Capital Fund’s equity portfolio for almost 22 years now. Although the fund kept its stake in the company unchanged during the third quarter, it remains extremely optimistic about the company’s future prospects. One of the major reason for the fund’s bullishness on the stock is Arrow Electronics, Inc. (NYSE:ARW)’s business, which FPA thinks is extremely hard to disrupt.

“Arrow continues to execute well and is making changes to improve its business. For example, Arrow’s Enterprise Computing Solutions business has become more software driven, and this could lead to margin expansion. In addition, as the components business begins to take on more design work and offer more service-based solutions, we believe that margins in this business could also expand.”

Arrow’s stock has appreciated by over 25% so far in 2016 and recently made its lifetime high at $68.07.

Avnet, Inc. (NYSE:AVT)

– Shares Held By FPA Capital Fund (as of September 30): 767,480

Avnet, Inc. (NYSE:AVT) is also one of the oldest equity holdings of FPA Capital Fund, having made its debut in the fund’s portfolio during the first quarter of 2000. During the latest quarter, the fund increased its stake in the company by 83,430 shares. Since Arrow Electronics and Avnet, Inc. (NYSE:AVT) operate in the same space – distribution arm for component and computer equipment manufacturers – FPA Capital Fund’s thesis on both companies is the same. In its commentary, the fund mentioned that it sees recent changes at Avnet (replacing the CEO, selling its underperforming technology solutions business for $2.6 billion, and the acquisition of Premier Farnell for around $1 billion), as positive developments. The fund’s managers wrote, “we have confidence these changes have improved the overall business quality and increased Avnet’s optionality via a de-levered balance sheet.” On November 14, Avnet revealed that it has acquired a majority stake in Hackster, Inc. for an undisclosed amount and said that it will acquire the rest of the company by January 2017.

Disclosure: None