Pacifica Capital Investments’ Top Stock Picks Lead Into Q2 by Warren Buffett’s Holding Company

Pacifica Capital Investments is a Los Angeles-based investment firm founded by Steve Leonard in April of 1998. Mr. Leonard’s asset management firm primarily seeks well-run companies that trade at prices below their intrinsic value and this strategy has paid off handsomely since the firm’s inception. However, value investing hasn’t performed exceptionally over the past several years, and neither did PCI’s investment strategy. Pacifica Capital Investments has lagged behind the S&P 500 gauge each year since 2010, but the firm’s annualized return of 11.1% since inception is still ahead of the S&P 500’s 5.4% annualized return over the same time span. PCI has had only five down years since inception, and the losses in three of those five years did not exceed 1.1%. Considering the strong performance of PCI’s equity portfolio during its 18-year history, retail investors could strongly benefit from getting a glimpse into PCI’s top stock picks ahead of the second quarter of 2016, which we’ll provide in this article.

Steve Leonard of Pacifica Capital

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#5. Leucadia National Corp. (NYSE:LUK)

 – Number of shares held by PCI (as of March 31): 907,616

 – Value of PCI’s holding (as of March 31): $14.68 Million

Pacifica Capital Investments increased its exposure to Leucadia National Corp. (NYSE:LUK) by 127,060 shares during the first quarter of 2016, lifting its holding to 907,616 shares. The increased stake was valued at $14.68 million on March 31 and accounted for 7.63% of PCI’s equity portfolio. Leucadia National, the parent company of securities and investment banking firm Jefferies, has seen its market value drop by 3% since the beginning of 2016. Aside from Jefferies, the diversified holding company also owns beef processing, oil and gas E&P (exploration and production), and fixed wireless broadband services businesses. First quarter revenue from the company’s beef processing business, which accounted for 81% of net revenue, decreased to $1.63 billion from $1.86 billion year-over-year, due to lower average selling prices for boxed beef and other products. Meanwhile, Jefferies net revenue dropped to $300.79 million from $591.44 million as a result of the extremely volatile market environment. Murray Stahl’s Horizon Asset Management reported ownership of 1.03 million shares of Leucadia National Corp. (NYSE:LUK) in its 13F for the March quarter.

#4. Five Below Inc. (NASDAQ:FIVE)

 – Number of shares held by PCI (as of March 31): 515,404

 – Value of PCI’s holding (as of March 31): $21.31 Million

Mr. Leonard’s firm trimmed its position in Five Below Inc. (NASDAQ:FIVE) by 11,250 shares during the January-to-March period, ending the first quarter with 515,404 shares of the company valued at $21.31 million. The shares of the specialty value retailer are up by 25% since the start of the year and trade at a hefty P/E multiple of 25.2, which is above the ratio of 18.0 for the Nasdaq 100 Index. Nonetheless, analysts at Credit Suisse recently resumed coverage on Five Below with an ‘Outperform’ rating and a price target of $47, saying the discount retailer is “one of the most attractive growth stories in retail”. The company’s net sales for fiscal year 2015 ended January 30, 2016 totaled $832.00 million, up from $680.20 million recorded for fiscal year 2014. The fiscal year 2015 top-line growth was driven by higher non-comparable store sales, as a result of 71 new store openings during the fiscal year, and higher comparable-store sales. Columbus Circle Investors, managed by Clifford G. Fox, owns 882,453 shares of Five Below Inc. (NASDAQ:FIVE) as of March 31.

We’ll study Pacifica’s top three stock picks on the next page.

#3. Goldman Sachs Group Inc. (NYSE:GS)

 – Number of shares held by PCI (as of March 31): 152,276

 – Value of PCI’s holding (as of March 31): $23.90 Million

Mr. Leonard and his team were largely impartial to Goldman Sachs Group Inc. (NYSE:GS) in the first quarter of 2016, as the Los Angeles-based firm increased its stake in the investment bank by a mere 257 shares during the quarter. The $23.90 million stake constituted 12.43% of PCI’s equity portfolio at the end of the March quarter. According to fresh reports, the Wall Street investment bank plans to cut 10% of its fixed-income trading workforce after the company’s clients were forced to engage in less trading activity due to the economic uncertainty that loomed over the financial markets in the first quarter. Goldman Sachs recorded net revenue from Institutional Client Services (trading revenue) of $3.44 billion for the first quarter of the year, down by 37% year-over-year due to increased market volatility and plunging asset prices. Shares of Goldman Sachs are down by 12% since the start of 2016 and change hands at around 9.00-times expected earnings, below the forward P/E multiple of 12.40 for the investment banking and brokerage sector. Edgar Wachenheim’s Greenhaven Associates has 3.54 million shares of Goldman Sachs Group Inc. (NYSE:GS) in its equity portfolio as of the end of March.

#2. Starbucks Corporation (NASDAQ:SBUX)

 – Number of shares held by PCI (as of March 31): 554,741

 – Value of PCI’s holding (as of March 31): $33.12 Million

Pacifica Capital Investments reduced its Starbucks Corporation (NASDAQ:SBUX) stake by a mere 3,100 shares during the first three months of 2016, ending the March quarter with 554,741 shares worth $33.12 million. The position accounted for 17.23% of PCI’s equity portfolio at the end of March. The U.S coffee chain plans to open up to 150 Starbucks stores in South Africa according to the company’s founder and Chief Executive Officer Howard Schultz. The Seattle-based coffee chain opened its first store in the second-largest economy on the African continent in late April, which attracted such a high number of patrons that even the company’s executives were surprised. “I’ve never seen a line like this after of week (sic) of our opening”, said Mr. Schultz soon after the opening of the store. Starbucks shares have lost 5% of their value year-to-date, but they are up by 14% in the past 12 months. David Harding’s Winton Capital Management upped its stake in Starbucks Corporation (NASDAQ:SBUX) by 85% during the March quarter, to 936,288 shares.

#1. Berkshire Hathaway Inc. (NYSE:BRK.B)

 – Number of shares held by PCI (as of March 31): 254,063

 – Value of PCI’s holding (as of March 31): $36.05 Million

The Los Angeles-based firm owns 254,063 Class B shares of Berkshire Hathaway Inc. (NYSE:BRK.B) as of March 31, 5,045 shares less than at the end of the December quarter. The $36.05 million stake accounted for 18.75% of PCI’s equity portfolio at the end of the first quarter. In the past several years, Warren Buffett’s holding company has shifted or altered its original acquisition strategy, as voiced in a shareholder letter more than three decades ago, which said that “our acquisition preferences run toward businesses that generate cash, not those that consume it”. The Oracle of Omaha and his team have acquired more capital-intensive businesses in recent years, arguing that there are only a few companies that don’t require capital investments. Moreover, the revered investor is not as afraid of activists as he had been a few years ago, saying that each separate business operated by Berkshire would be worse off individually than under the Berkshire umbrella. Class B shares of Berkshire Hathaway have gained 7% since the beginning of 2016. Ken Fisher’s Fisher Asset Management owns 5.58 million Class B shares of Berkshire Hathaway Inc. (NYSE:BRK.B) as of March 31.

Disclosure: None