Robert L. Rodriguez has a history of making the right move at the right time. As the chief investment officer of the FPA Capital Fund, he has made his shareholders 15 times their money since 1990, avoided most of the tech meltdown of 2000 and was among the first to get in on the energy boom.

With a 20% annual return for the last decade and a half, no fund manager has a better track record. Not Marty Whitman. Not Ralph Wanger. Not Bill Nasgovitz. Not even the legendary Bill Miller. Rodriguez sits alone at the top.

The key to his success is simple: He invests in fundamentally sound, well-run small-cap companies with a history (usually at least 10 years) of proven results. He gets in when no one else has the guts or the foresight to buy.

In 1974, Rodriguez heavily invested in beaten-down utility companies that no one else wanted to own. He went long on Consolidated Edison (a New York-based utilities giant) just as the Dow hit a 12-year low, pension funds were pulling their money out of stocks altogether and retail investors were running for cover.

By 1975, Consolidated Edison doubled. And today it trades for over $43. Not too bad. Only a 27-bagger.

More recently, Rodriguez was one of the first guys to invest at the beginning of the energy boom. After staying all but out of the energy sector for 20 years, he increased his fund’s exposure to 8% in 1999. As he said at a Morningstar conference back then, “We view the drilling industry as having one of the most attractive outlooks within the energy sector.”

These days, there isn’t any one sector that is beaten down and left for dead the way utilities were in 1974 and energy was in 1999. But Rodriguez has found an industry — and one company in particular — he likes: manufactured housing.

Manufactured housing is between 10-35% cheaper than traditional on-site homes. So it makes sense that in this overinflated market, more and more people will seek out more affordable options.

From Boom to Bust to Boom?

Cheap manufactured housing had its heyday in the 1990s. That’s when everyone was getting rich speculating in technology, interest rates were falling and anyone with a first and last name could get a cheap loan — which they did.

In 1991, 171,000 manufactured homes were shipped across the country. By 1998, the market peaked, and 373,000 homes were shipped out. During that stretch, the major manufactured homebuilders, Champion Enterprises (CHB:NYSE), Skyline Corp. (SKY:NYSE) and Palm Harbor Homes (PHHM:NASDAQ), made a fortune. And so did their shareholders.

Champion rose 2,037% a year during that seven-year stretch. Skyline rose 166%. And Palm Harbor rose 193%.

Then the party ended.

All those bad loans came back to bite both the banking industry and the homebuilders in the butt. By 2003-04, 100,000 manufactured homes were repossessed. Consumers defaulted on their loans like it was no big deal. Many banks would no longer give money to clients to buy manufactured housing. Those that did significantly increased their interest rates.

Just like that, all those stock gains from the 1990s were erased. And today, those same companies (with the exception of one) that were riding high are trading for less than their peaks some eight years ago. But with on-site home prices at all-time highs and interest rates on the rise, manufactured homes may be geared for a bit of a comeback. Rodriguez certainly thinks so.

He has been steadily adding shares of Fleetwood Enterprises, Inc. (FLE:NYSE) to his FPA Capital Fund over the last year.

Fleetwood is one of North America’s three largest manufactured housing companies. It’s been around since 1950. It has traded publicly since 1965. And it is down 81% since 1998.

Over the last decade, the company did just about everything wrong you could imagine. Forgetting it was a manufacturing company, it got into the lending and retail business at the top of the market to become a one-stop shop for its customers. Management ignored regional tastes and preferences and simply cranked out cookie-cutter homes — figuring what was popular in California would be popular in Florida. And the company’s financial situation went to hell in a handbasket.

From 1998-2005, sales fell from $3.05 billion to $2.37 billion. Net income plunged from $108.5 million to a loss of $72.6 million. And its debt load increased nearly fivefold. Nice work, huh?

Management all but killed this company over the last decade. And many people still think Fleetwood is on its deathbed.

But in March 2005, Fleetwood made a desperate (but much needed) move. It hired Elden Smith, a seasoned veteran in the business, to take over as the company’s president and CEO.

Smith is no stranger to Fleetwood. He worked at the company from 1968-1997. Under his guidance, the company grew from nothing into the leader in both manufactured housing and recreational vehicles (the company’s other main area of expertise). And today, he is focused on getting the ship back on course.

In the last year, Smith sold the company’s bleeding retail and finance businesses (which contributed to nearly 20% of the company’s losses in recent quarters) to Clayton Homes for $74 million. He has stopped all projects that don’t have anything to do with the company’s main manufacturing focus. He reduced the workforce by 9% — including the number of executive officers from 24 to just 10. And he has vowed to increase margins, market share and sales.

So far, it looks like he is doing just that.

In the third quarter of FY06, sales for manufactured housing rose 14%, thanks to a FEMA contract to provide housing to Katrina victims in New Orleans. And key financial metrics indicate Fleetwood has seen the worst.

Certainly, Rodriguez likes what he is seeing. His fund owns a $57.1 million stake in the company — up from $19.5 million last year. And it is one of only three companies he has added to his portfolio in the last quarter. That’s saying something, considering he doesn’t like stocks right now. Forty percent of his entire portfolio is in cash.

Time will tell if Rodriguez is right and Fleetwood rebounds. But I wouldn’t bet against him. He only has the best track record over the last 15 years. And if he is right, Fleetwood could be a four- or five-bagger.

Regards,
James
June 08, 2007

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