Steve Leonard of Pacifica Capital Investments doesn’t come from Wall Street, LaSalle Street or even Canary Wharf, but from the commercial real estate market of California. After spending 20 years selling commercial real estate, Leonard started the Pacifica fund in 1998 and has since then, consistently outperformed the S&P 500 by a weighted annualized return of 11.2% versus 3.6% for the S&P by investing in high-value, non-cyclical companies. Let’s look at the top five stocks that Leonard picked for his equity portfolio.
At the top spot is Goldman Sachs Group, Inc. (NYSE:GS). During the maelstrom on Wall Street in 2008 that claimed Bear Stearns, Lehman Brothers and Merrill Lynch, only Goldman Sachs Group, Inc. (NYSE:GS), JP Morgan Chase, and Morgan Stanley (NYSE:MS) (thanks to a $9 billion infusion from Mitsubishi Bank) emerged intact…almost.
Goldman Sachs restructured itself as bank holding company, providing it with an asset base to help fund its investment and lending operations. As a result, the more conservative Goldman Sachs Group, Inc. (NYSE:GS) has a balance sheet many Wall Street firms would envy; revenue is up 19% from 2011; net income jumped 68%, and the trailing price earnings ratio of 10.2x beats the rest of the sector at 25.5x. Compare this to Morgan Stanley (NYSE:MS) with a trailing price/earning ratio of 1111x and 17% drop in 2012 revenue.
At number two is Berkshire Hathaway (NYSE:BRK.B) at 18.53% of the total Pacifica portfolio. Synonymous with Warren Buffett, BRK.B, is actually the holding company for a number of diverse businesses such as insurance, construction, media and finance. Buffett is known for being debt-adverse, evident in the debt/equity ratio of his company of 0.3x. Over the past 3 years, revenue has grown consistently — up 13% in 2012 from 2011 – and net income is up 44% from 2011. Since the start of the year, BRK.B stock is up 13% to 105.56.
Third on the list of the top five is Starbucks Corp (NASDAQ:SBUX). Once know for only coffee, Starbucks Corp (NASDAQ:SBUX) has branched out to baked goods, tea and even fruit smoothies through recent acquisitions of La Boulange, Teavana and Evolution Fresh. As a result, Starbucks Corp (NASDAQ:SBUX) is expected to maintain its market dominance in this sector against competitors such as Green Mountain Coffee (GMCR), Dunkin Donuts (DNKN) and Jamba Juice (JMBA), all of which are just brewing in Starbucks Corp (NASDAQ:SBUX)’s wake.
Who’s the best of the rest?
At number four is R. G. Barry Corp. (NASDAQ:DFZ). The maker of Dearfoams slippers has a price/earning ratio of 12x versus the industry average of 13.5x and has consistent revenue growth, coupled with a 93% increase in net income from 2011. Recently, however, the maker of competitor slippers, Isotoner, has asked a federal judge in Ohio to order R. G. Barry Corp. (NASDAQ:DFZ) to cease selling the slippers that look suspiciously like Isotoners, especially to JC Penney which recently switched from Isotoner to Dearfoams. Year over year, DFZ is up 15% to $13.45 and shows little sign of being undermined by this impending lawsuit.
Lastly, there is Wells Fargo & Co (NYSE:WFC). With 457,139 shares, Pacifica is the third largest holder of Wells Fargo & Co (NYSE:WFC), followed by Theleme Partners and Berkshire Hathaway. Of the four major banking stocks — Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and Citigroup (NYSE:C) — WFC is considered the most financially sound and will continue to benefit from the recovery in the housing market. During the financial crisis in 2008, Wells Fargo acquired Wachovia and subsequently doubled in size. But despite its size, WFC has maintained its profitability and cost-effective business model that has contributed to growth in the bottom line to $19bln in 2012, up 19% from 2011.
More than three-quarters of Pacifica’s positions are in the top five stocks discussed above which explains why Steve Leonard is known for making “concentrated bets”–a strategy we’ve seen in other funds such as Monarch Alternative Capital. But since the top five are some of the most stable and least risky companies in their sector, the strategy could be beneficial for investors in the fund, or for those who want to mimic the fund’s strategy without the million dollar investment. To see the rest of the positions in Pacifica Capital Investments, continue reading here on Insider Monkey.
Disclosure: none