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Jan. 3, 2017, 1:22 p.m. EST

Four stock picks in an outperforming fund that has only 31 holdings

Bob Burnstine of Fairpointe Capital has doubled the returns of the S&P 500 this year

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By Philip van Doorn, MarketWatch


Justin Sullivan/Getty Images
Wal-Mart Stores is one of the largest positions held in the Fairpointe Focused Equity Fund.

Fairpointe Capital’s focused equity strategy, which has only 31 holdings in a portfolio that mainly includes private accounts, has doubled the returns of the S&P 500 Index this year.

The portfolio was up 19.9% for 2016 (through November), compared with 9.8% for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.39%

Among the best-performing holdings this year are Kennametal Inc. /zigman2/quotes/208770361/composite KMT +2.95% a Pittsburgh-based maker of industrial machinery that has soared 75%; Quanta Services Inc. /zigman2/quotes/203420082/composite PWR +2.34% , a Houston-based provider of engineering services for the electric-power, oil and gas infrastructure industries that has increased 73%; and Apache Corp. /zigman2/quotes/200648444/composite APA +1.46% , a Houston-based oil and natural gas exploration and production company that’s up 52%.

We spoke with Bob Burnstine, president of Fairpointe Capital LLC of Chicago, who is also a fund manager running the firm’s focused equity strategy. He named four stocks, below, that he believes are good values to buy today, despite high valuations in the U.S. stock market.

Fairpointe has about $5 billion in assets under management, with roughly $65 million managed in its focused equity strategy, which was launched in August 2011. The firm serves as the manager for the AMG Managers Fairpointe Focused Equity Fund /zigman2/quotes/205214724/realtime AFPTX -0.18% , which follows precisely the same strategy.

“By owning 30 stocks, people are investing in us for our research capabilities, and we are not going to look anything like a benchmark [index].”

Bob Burnstine, president of Fairpointe Capital LLC

The AMG fund — previously called the Aston/Fairpointe Focused Equity Fund — was established in December 2014, so it doesn’t have much of a track record. But Fairpointe provided total return information for the strategy, through Nov. 30, as verified by Ashland Partners:

Total return - 2016 Total return - trailing 12 months Avg. 3-year annual return Avg. 5-year annual return
Fairpointe Focused Equity Strategy, net of fees 19.9% 12.5% 6.8% 15.6%
Russell 1000 Index /zigman2/quotes/210598144/delayed RUI   10.0% 8.0% 8.9% 14.5%
S&P 500 /zigman2/quotes/210599714/realtime SPX   9.8% 8.1% 9.1% 14.5%
Source: Fairpointe Capital LLC

In an interview on Dec. 27, Burnstine called 2015 a “tough year” for his strategy, and said a handful of major tech players were “sort of falsely leading the market to be flat.” Those included Amazon.com /zigman2/quotes/210331248/composite AMZN -1.68% , Netflix Inc. /zigman2/quotes/202353025/composite NFLX -6.15% ,  Facebook Inc. /zigman2/quotes/205064656/composite FB -2.38%  and Alphabet Inc. /zigman2/quotes/205453964/composite GOOG -0.60% , which holds Google.


Anne Ryan, zrIMAGES
Bob Burnstine, president and portfolio manager at Fairpointe Capital LLC.

Four stocks recommended by Burnstine

The Fairpointe Focused Equity strategy usually holds between 30 and 35 stocks.

“We want each stock to have the ability to impact performance,” Burnstine said. “We believe that by owning 30 stocks, people are investing in us for our research capabilities, and we are not going to look anything like a benchmark [index].”

Burnstine said a time frame of three to five years is the strategy’s “greatest advantage.” The fund has relatively low turnover of typically six to eight stock “going in and out of the portfolio” each year, he said, while also explaining that the portfolio will be rebalanced as stocks get closer to his target sale prices.

Burnstine focuses on stocks that are priced below where he thinks they should be, based on enterprise value, which encompasses his estimate of a company’s earnings power over the next three to five years.

Rather than focusing on the stocks that have been the year’s hottest in the portfolio, Burnstine mentioned four that he believes are still excellent buys today:

/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
loading...
/zigman2/quotes/208770361/composite
US : U.S.: NYSE
$ 30.71
+0.88 +2.95%
Volume: 986,974
Oct. 18, 2019 6:30p
P/E Ratio
10.58
Dividend Yield
2.61%
Market Cap
$2.54 billion
Rev. per Employee
$231,251
loading...
/zigman2/quotes/203420082/composite
US : U.S.: NYSE
$ 40.22
+0.92 +2.34%
Volume: 2.19M
Oct. 18, 2019 6:30p
P/E Ratio
18.32
Dividend Yield
0.40%
Market Cap
$5.72 billion
Rev. per Employee
$284,985
loading...
/zigman2/quotes/200648444/composite
US : U.S.: NYSE
$ 22.19
+0.32 +1.46%
Volume: 0.00
Oct. 18, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
4.51%
Market Cap
$8.44 billion
Rev. per Employee
$2.15M
loading...
/zigman2/quotes/205214724/realtime
US : U.S.: Nasdaq
$ 11.31
-0.02 -0.18%
Volume: 0.00
Oct. 18, 2019
loading...
/zigman2/quotes/210598144/delayed
US : US Composite
1,648.69
-6.67 -0.40%
Volume: 2.76M
Oct. 18, 2019 5:52p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
loading...
/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 1,757.51
-29.97 -1.68%
Volume: 3.37M
Oct. 18, 2019 4:00p
P/E Ratio
72.92
Dividend Yield
N/A
Market Cap
$869.36 billion
Rev. per Employee
$359,671
loading...
/zigman2/quotes/202353025/composite
US : U.S.: Nasdaq
$ 275.30
-18.05 -6.15%
Volume: 23.45M
Oct. 18, 2019 4:00p
P/E Ratio
87.87
Dividend Yield
N/A
Market Cap
$120.54 billion
Rev. per Employee
$2.22M
loading...
/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 185.85
-4.54 -2.38%
Volume: 16.88M
Oct. 18, 2019 4:00p
P/E Ratio
31.49
Dividend Yield
N/A
Market Cap
$530.22 billion
Rev. per Employee
$1.57M
loading...
/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 1,245.49
-7.58 -0.60%
Volume: 1.35M
Oct. 18, 2019 4:00p
P/E Ratio
25.14
Dividend Yield
N/A
Market Cap
$805.68 billion
Rev. per Employee
$1.39M
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