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Amid a weeks-long rally in stocks, some investors may already have forgotten how painful it was when the market crashed in late February and March.
For David Giroux, the memory is fresh — not only of sleepless nights, 18-hour days and seven-day workweeks, but of the $9 billion he poured into the market as other investors were running away.
Giroux is the manager of the $39 billion T. Rowe Price Capital Appreciation Fund PRWCX, +0.63%. Combined with separate accounts managed under precisely the same strategy, he is running a total of $57 billion in assets.
The fund’s strategy is actually a conservative one, “to generate equity-like returns with less risk than the overall market.” Its allocation to stocks, bonds and other debt investments shifts over time, but the equity portion averages about 61% through a market cycle, Giroux said in an interview.
T. Rowe Price Capital Appreciation has a five-star rating (the highest) from Morningstar, and is ranked in the top percentile within the investment research firm’s “U.S. Fund Allocation — 50% to 70% Equity” category for five, 10 and 15 years and in the second percentile for three years.
At the end of 2019, the fund was only 55% invested in stocks, with 18% in cash, because the stock market was trading at about 19 times earnings estimates, its highest forward price-to-earnings ratio since 2002.
“We couldn’t find anything that hit our return threshold. I wish I could say [the low allocation to equities] was because we saw the virus coming,” Giroux said.
Heading into the coronavirus crisis, the fund had no positions in shares of banks, and very low exposure, about 0.3%, to energy stocks, he said.
The S&P 500 Index SPX, +0.82% hit its all-time closing high Feb. 19, after which it fell 34% through the close March 23.
“All told, we put $9 billion to work in the downturn” Giroux said.
David Giroux, manager of the T. Rowe Price Capital Appreciation Fund.
T. Rowe Price Group Inc.
Stock moves
Giroux initiated eight stock positions and added significantly to eight more during the 23 trading sessions of the downturn:
| Company | Ticker | Action | Price change – Feb. 19 through March 23 | Price change – March 23 through June 1 | Price change – Feb. 19 through June 1 | Price change – 2020 | Price change – 2019 |
| Global Payments Inc. | GPN, -0.16% | Added | -44% | 57% | -12% | 0% | 77% |
| NXP Semiconductors NV | NXPI, +2.27% | Added | -43% | 28% | -26% | -22% | 74% |
| Envista Holdings Corp. | NVST, +0.42% | Added | -58% | 80% | -24% | -28% | N/A |
| Humana Inc. | HUM, +0.84% | Added | -43% | 87% | 6% | 10% | 28% |
| UnitedHealth Group Inc. | UNH, +0.12% | Added | -36% | 57% | 0% | 4% | 18% |
| Fortive Corp. | FTV, +2.99% | Initiated | -45% | 48% | -19% | -19% | 13% |
| Ingersoll-Rand Inc. | IR, +0.31% | Initiated | -48% | 47% | -24% | -22% | 79% |
| Cintas Corp. | CTAS, +1.61% | Initiated | -48% | 60% | -18% | -7% | 60% |
| Hilton Worldwide Holdings Inc. | HLT, +2.06% | Added | -44% | 29% | -27% | -26% | 54% |
| Marriott International Inc. Class A | MAR, +0.61% | Initiated | -52% | 36% | -36% | -37% | 39% |
| Yum Brands Inc. | YUM, +1.86% | Added | -46% | 60% | -14% | -10% | 10% |
| PNC Financial Services Group Inc. | PNC, +0.16% | Initiated | -47% | 42% | -25% | -28% | 37% |
| Linde PLC | LIN, +0.98% | Initiated | -33% | 37% | -8% | -4% | 36% |
| Keurig Dr Pepper Inc. | KDP, -1.05% | Added | -20% | 22% | -2% | -2% | 13% |
| Stryker Corp. | SYK, +0.57% | Initiated | -44% | 56% | -12% | -6% | 34% |
| American Electric Power Co. | AEP, -0.18% | Added | -32% | 23% | -17% | -9% | 26% |
| Data source: FactSet | |||||||
Click on the tickers for more about each stock, including company profiles. Scroll the table to see all the data.
All 16 stocks have risen considerably since the market bottom March 23, although all but two were below their Feb. 19 levels as of the close June 1. The purchases were made on various days, so the fund’s returns on the stocks didn’t match what’s on the table.
Giroux said a strong balance sheet was a critical component of the analysis made before any of the purchasing decisions.
“The most important thing we had to do for all the companies under stress was to decide who could make it to the other side and live with a tough economy for the next 12 to 18 months,” he said.
He commented on some of the 16 companies listed above.
• For Marriott Worldwide Holdings MAR, +0.61%, the analysis included understanding the health of the franchisees that operate most of the hotels, and what assistance the franchisees could expect from lenders.
• Giroux said he was “baffled” that shares of Humana HUM, +0.84% declined so much during the COVID-19 crisis. “The market realized it was mistake, but we bought half a billion [dollars] in Humana stock in a two-week period, to take advantage of that,” he said.
• Before the crisis, Fortiv FTV, +2.99% provided annual earnings guidance of $3.75 a share, which meant to Giroux that when the stock fell to about $40 a share, it was trading for less than 10 times “normalized” earnings. “This should normally trade at a high teens or low 20s multiple, so it could double in our time horizon,” he said. That time horizon is usually two to three years, but for stocks scooped up during the panic, the horizon is stretched to four or five years, Giroux said.
• Shares of NXP Semiconductors NXPI, +2.27% had fallen by more than half from their intraday high of $139.59 on Feb. 17 through their intraday low of $58.41 on March 18, making the them very attractive, to Giroux, with balance-sheet leverage of “only two times,” he said.
• The new position in PNC Financial Services Group PNC, +0.16% was Giroux’s “first bank for a while.” He said PNC has “the best management team in all banks.” PNC sold its 22% stake in BlackRock Inc. BLK, +0.57% last month, with CEO William Demchak saying the move would leave the bank “very well-positioned to take advantage of potential investment opportunities that history has shown can arise in disrupted markets.” When asked whether expanding the bank with that money might not be the best move, in light of BlackRock’s higher profit margins, Giroux said he liked the move because of “fee pressure” on BlackRock’s passive money management business from Vanguard, and because of BlackRock’s high stock valuation to earnings.
A ‘personal toll’
Despite managing the T. Rowe Price Capital Appreciation Fund since 2006, Giroux said putting money to work during the coronavirus crash wasn’t easy.
“It took an emotional and personal toll. If you are investing your clients’ money, and you buy something and the next day it is down 5%, with so much negativity, it is hard,” he said.
Giroux said that the fund typically makes stock selections slowly, as he takes “deep dives” into about 10 companies a year to analyze possible investments.
“That process usually takes a week. But I took 37 deep dives in the course of a week. We ended up choosing the eight best [for new positions]. I didn’t see my family and didn’t sleep a lot,” he said.
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