Quick Take: The Shepherd Street Equity Fund (SSEFX) is a mixed bag.
David Rea and the fund’s two other co-managers invest in companies with rapidly growing earnings, as well as in undervalued stocks.
Holdings in the portfolio range in size from financial services giant Citigroup Inc (C) to Given Imaging (GIVN), a medical equipment maker with a market cap of less than $300 million.
For the three years ended last month, Shepherd Street Equity lost 6.2% annualized. That put it ahead of its peers, which fell 10.3% over the same period. The fund gave up 20.8% this year through July, while the average large-cap blend fund was off 20.3%.
The Full Interview:
David Rea didn’t have to go very far to find Triad Guaranty (TGIC), a major holding in the Shepherd Street Equity fund. The company’s headquarters are just blocks from his office in Winston-Salem, N.C.
The stock of the residential mortgage insurer, which ranks second in the portfolio, has risen about 20% this year, making it one of his best performers, Rea says.
The $13-million fund currently has the bulk of its assets — about 30% — in financial services businesses like Triad. Rea likes the sector because it features the reasonably priced stocks of growing companies that he favors.
What’s more, some of his investments in this group are potential takeover targets, says Rea, who keeps an eye out for companies in industries that are consolidating. He cites Pinnacle Financial Partners Inc. (PNFP) as an example.
The money manager says he also began investing in the Nashville-based bank holding company about two months ago because its profits are fattening rapidly, but the stock trades for just a bit over book value.
Another bank stock, Southern Finl Bancorp (SFFB), which holds the third place position in the portfolio, has financial characteristics similar to those of Pinnacle and, like Triad, has risen about 20% this year, says Rea.
Rea looks for companies he thinks can grow earnings faster than their industry peers when picking stocks. He prefers high margins and return on equity, low debt, and a large market share. The fund mixes growth- and value-oriented investments, and owns companies of all sizes. It doesn’t own many, however.