This Mutual Fund Had A Remarkable 2016 And Remains Convinced About Its Top Picks

The Goodhaven Fund (GOODX) is a mutual fund  run and managed by Florida-based investment advisory company Goodhaven Capital Management. In its latest annual report, Goodhaven’s fund managers elaborated on the reasons behind the fund’s remarkable performance last year and have shared their views on the financial markets going forward. Among other things, the fund managers mentioned the sharp recovery in oil, gas and metals last year as one of the prime reasons why Goodhaven Fund managed to post 20.13% in the first 11 months of 2016.

Although last year was terrific, Goodhaven has grossly underperformed the S&P 500 since its inception (April 1, 2011) by generating a meager annual return of 4.71% against the 11.71% gains posted by the Index. Currently, the fund manages assets worth in excess of $270 million and is trading up 1% year-to-date. In this post, we are going to take a look at Goodhaven’s five largest U.S. equity holdings at the end of 2016 and will discuss what the fund’s managers think about these stocks.

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#5 Alphabet Inc (NASDAQ:GOOG)

– Shares Held By Goodhaven Capital Management (as of December 31): 17,482

– Value of The Holding (as of December 31): $13.49 Million

Let’s start with Alphabet Inc (NASDAQ:GOOG) in which Goodhaven Capital Management reduced its stake by 12% during the fourth quarter. In their letter, the fund managers mentioned that Alphabet Inc (NASDAQ:GOOG) continues to grow at a staggering rate and despite the stock being no longer cheap, it is not ‘overpriced given its valuation, prospects for growth, and generation of free cash flow.’ They are also of the view that Alphabet’s doesn’t face a major threat from its competitors, but from government regulations in the countries it operates. Alphabet’s stock recently made its lifetime high at $841.95 and is currently trading up 6.14% year-to-date. In other news, on February 13, Oracle Corporation (NYSE:ORCL) filed an appeal of last year’s court decision which denied it $9 billion in damages from Alphabet over the use of Java Code in Android OS.

#4 White Mountains Insurance Group Ltd (NYSE:WTM)

– Shares Held By Goodhaven Capital Management (as of December 31): 17,589

– Value of The Holding (as of December 31): $14.70 Million

White Mountains Insurance Group Ltd (NYSE:WTM) dropped from the third position to fourth position in Goodhaven Capital Management’s equity portfolio during the fourth quarter owing majorly to the fund reducing its stake in the company by 22% during the quarter. Similar to Alphabet, White Mountains Insurance Group Ltd (NYSE:WTM)’s stock is also trading close to its lifetime high, which it reached recently. Goodhaven’s fund managers think that White Mountains Insurance Group Ltd (NYSE:WTM) made a wise decision last year by selling some of its subsidiaries and using the proceeds from those sales to buy its stock at or near tangible book value. They also think that rising interest rates will be beneficial for the company going forward. For its most recent quarter, the insurance company reported a loss from continuing operations of $5.81 per share on revenue of $268.2 million, compared to a loss of $0.47 per share on revenue of $1.36 billion it had posted last year.

#3 Leucadia National Corp. (NYSE:LUK)

– Shares Held By Goodhaven Capital Management (as of December 31): 699,465

– Value of The Holding (as of December 31): $16.26 Million

Moving on, Goodhaven Capital Management lowered its holding in Leucadia National Corp. (NYSE:LUK) by 23% between October and December. The move can be seen as a profit booking exercise as Leucadia National Corp. (NYSE:LUK)’s stock registered a gain of over 25% during the October-December period. The fund upped its stake in the investment holding company earlier in 2016 when its stock was trading at a discount to its tangible book value. According to Goodhaven Fund’s managers, barring Federated Investors most subsidiaries of Leucadia National Corp. (NYSE:LUK) have started performing well and the former will also start doing well once assets migrate back to its money funds amid a rising rate environment. Earlier this month, foreign exchange broker FXCM Inc (NASDAQ:FXCM) was banned from operating in the U.S. on charges of defrauding its retail customers. As part of the deal, FXCM’s U.S. accounts will be sold to Gain Capital and the proceed from this sale will go towards repaying the $300 million loan that Leucadia had extended to FXCM in 2015.

#2 Barrick Gold Corporation (USA) (NYSE:ABX)

– Shares Held By Goodhaven Capital Management (as of December 31): 2.42 Million

– Value of The Holding (as of December 31): $38.68 Million

Barrick Gold Corporation (USA) (NYSE:ABX) was another stock in which Goodhaven Capital Management lowered its stake substantially during the fourth quarter, by 13%. However, the fund remains exremely optimistic on the company. In its annual letter, Goodhaven’s fund managers applauded the company and its CEO John Thornton for successfully reducing the debt on its balance sheet by $4.5 billion, building significant liquidity and reducing the ‘all-in sustaining costs.’ The fund believes that gold prices will move higher in the coming years if it follows its historical behavior of acting as a hedge against currency depreciation and this obviously will benefit Barrick Gold Corporation (USA) (NYSE:ABX). Shares of Barrick Gold Corporation have appreciated by over 20% so far in 2017, but are still trading below the $20-mark. On February 20, analysts at BMO Capital Markets reiterated their ‘Buy’ rating on the stock and set a price target of $20 per share.

#1 WPX Energy Inc (NYSE:WPX)

– Shares Held By Goodhaven Capital Management (as of December 31): 3.30 Million

– Value of The Holding (as of December 31): $48.14 Million

WPX Energy Inc (NYSE:WPX) remained Goodhaven Capital Management’s largest equity holding at the end of December despite the fund reducing its stake in the company by 19% during the last quarter. In the last year, WPX Energy Inc (NYSE:WPX)’s stock has surged by 217% . Goodhaven thinks this performance was largely due to the company reducing its cost of drilling a well in Bakken formation from $11 million a few years ago to $5.5 million today and by making a major acquisition in Permian Basin in 2015, which proved out to be huge bargain.

“With oil prices now above $50 per barrel and a decent hedge book for 2017 and part of 2018, the company is well positioned to take advantage of the opportunities it has created in recent years. According to a recent corporate presentation, WPX is projecting that its oil output will almost double in the next two years.”

Last month, WPX Energy revealed that it has agreed to acquire $775 million worth of assets that will increase its Permian Basin operation to over 120,000 net acres and deepen the drilling inventory of the company’s top-tier Delaware Basin locations.

Disclosure: None