FPA Capital Fund’s Best and Worst Performers From Q4

Houghton Mifflin Harcourt Co. (NASDAQ:HMHC) was FPA’s biggest retractor, as it led to a 0.47% loss during the fourth quarter. Houghton Mifflin Harcourt Co. (NASDAQ:HMHC) has not performed well because the company missed quarterly earnings expectations and its Board of Directors recently has decided to terminate the CEO. The fund’s managers like the company’s core business of publishing K-12 textbooks in the U.S., but the former CEO, chose to expand the business into the Educational Technology industry by purchasing a division from Scholastic Corp. (NASDAQ:SCHL). This acquisition took management’s eye off the core business and the former CEO paid a substantial premium to acquire the business. The fund thinks that the board now understands it needs to find an operator who can manage the core business and generate high levels of free cash flow, given the concentrated competitive landscape and barriers to entry. FPA Capital Fund has materially increased its position in Houghton Mifflin Harcourt Co. (NASDAQ:HMHC) since their initial purchase as the stock declined closer to its downside-case scenario level.

SM Energy Co. (NYSE:SM) was another retractor causing a decline of 14 basis points during the December quarter. SM Energy Co. (NYSE:SM)’s stock fell because the company issued a large secondary offering of stock to help pay for a couple of large properties it acquired in the Permian Basin. FPA Capital agrees with the management’s view that the Permian Basin offers very attractive oil and gas properties. However, these properties will take a couple of years to develop and start generating cash flow for shareholders. FPA Capital Fund had already reduced its position in the stock by over 60% before September in anticipation of a large equity offering. The fund had earned substantial gains from the stock in the earlier quarters as SM Energy Co. (NYSE:SM)’s shares surged by 75% during 2016, even including an 11% drop in the fourth quarter.

In Apollo Education Group Inc. (NASDAQ:APOL), FPA Capital reduced its position buy 80% during the last quarter of 2016. The reason for cutting down the holding was that Apollo Education Group Inc. (NASDAQ:APOL)’s stock appreciated by nearly 25% and was close to the buyout price the board and shareholders had agreed to earlier in the year. The Department of Education has approved the acquisition of Apollo Education Group Inc. (NASDAQ:APOL) by a private equity group with several conditions.

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