Are you familiar with social entrepreneurship? Recently I had the opportunity to learn more about this relatively new concept of entrepreneurs solving the world's social and environmental problems by revolutionizing the way we function. Zipcar is a good example. A cousin to Social Entrepreneurship is socially responsible investing, known as SRI, which long ago joined mainstream investment management.
One of the best performing SRI funds available - Appleseed Fund - was featured in the May 10 issue of Barron's, which described the fund's approach to investing. Not only does the Appleseed Fund have the best three-year performance for socially responsible funds, it also has the best return for mid-cap value funds. It's a double threat. Today we'll explore some of its top holdings.
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Margin Of Safety
Appleseed's four main investment criteria for stock selection include margin of safety, strong free cash flow, consistent dividend and a low price-to-tangible book value. They then apply socially responsible screens on top of this and, finally, four of five managers must agree on each of its selections. It's a cumbersome process that works. Its three-year annualized return is 8%, about 14% better than the S&P 500. So far this year it's trailing the index, but that's bound to happen every so often. Long-term, they're winners.
Appleseed Fund Top Holdings
|Company||Price/Tangible Book Value||P/CF||P/S|
|John B Sanfilippo & Son (Nasdaq:JSBB)||0.9||3.6||0.3|
|Willis Group (NYSE:WSH)||(3.8)||14.6||1.6|
|Johnson & Johnson (NYSE:JNJ)||8.0||9.9||2.8|
|PICO Holdings (Nasdaq:PICO)||1.3||(9.5)||23.5|
|Sealed Air (NYSE:SEE)||13.3||7.7||1.0|
|Annaly Capital Management (NYSE:NLY)||1.2||0.8||7.9|
The Top Holdings
There are a number of familiar and not-so-familiar names on the list. At the very top is Pfizer, which appears in the top 10 holdings of 21 exchange-traded funds and 1257 mutual funds, meaning it isn't a very original pick but a quality company with a sustainable dividend. Number three is another drug company, Novartis. Its stock trades at 3.9 time's tangible book value per share, much better than Johnson & Johnson, its sixth biggest holding, and some of the other major drug manufacturers. The smallest of its top holdings is John B Sanfilippo and Son, an Illinois-based marketer of nuts. The fund has held the stock since inception in 2006, primarily because it sells below tangible book value, providing a great risk-reward opportunity.
Probably the most intriguing of the top holdings is PICO Holdings, a California-based holding company whose initials stand for Physician's Insurance Company of Ohio, a business it exited in 1995. Figuring out its various businesses and their worth is a full-time job. The company is comprised of three operating businesses: Vidler Water Company, Inc., UCP, LLC and NevadaLand and Resource Company, LLC. Land is the common theme of all three and there's lots of it in the Southwest. In addition to the operating businesses, it has the run-off operations of two insurance companies, a 37% equity interest in Spigit, Inc., a developer of innovation and idea development software (Warburg Pincus owns 46%) whose clients include Southwest Airlines - not to mention a bunch of cash, fixed-income and equity investments. Its stock hasn't done much in the last five years, up 0.02% annually, but if you look closely, you'll likely conclude its worth more than Mr. Market says it is.
Best Of The Rest
Appleseed owns just 21 stocks. Of those not in the top 10, two stand out in my opinion. The first is the Female Health Co. (Nasdaq:FHCO), developer of the female condom. The Chicago company has spent $140 million over the years developing the much-needed product. While it's easily the smallest holding of the fund, it's also the most socially responsible. I wrote enthusiastically about the company back in August 2008 when it was at an all-time high over $7. Currently trading under $6, it's a great entry point.
The second holding I like is Gaiam (Nasdaq:GAIA), the Colorado-based lifestyle company. It currently trades at less than two times tangible book and although the first half of the year delivered an operating loss of $1.7 million on $118.6 million in revenue, the loss was $6.7 million less year-over-year. With new products coming online in the third and fourth quarters from Discovery Communications and Reebok, profits are just around the corner.
Appleseed proves it pays to be responsible. (To learn more, check out What is socially responsible investing?)
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