Stock Quotes in this Article: DAL, F, MGA, PCLN

BALTIMORE (Stockpickr) -- In the last 13 years since its inception, the CGM Focus Fund (CGMFX) has seen its share of accolades. With average annual returns of 32% between 2000 and 2007 (vs. a paltry 1.7% return in the S&P 500), the heavily concentrated Boston-based fund was a perennial top performer, attracting more than $10 billion of assets.

At the helm is Ken Heebner , a veteran fund manager who earned the moniker “America’s hottest investor” from Fortune in 2008.

But CGM Focus’ time at the top came to a screeching halt amid the market exodus that year. The fund that had consistently outperformed Wall Street by a wide clip was suddenly down more than 48% in 2008 and lagging the S&P 500 by double digits once again in 2009. What happened?

Where Heebner had been adept in the past was with his own seemingly prescient brand of sector rotation, shifting the fund’s concentrated portfolio from one sector to another as economic tides changed. In 2008 and 2009, however, the fund’s heavy exposure to the financial sector and a series of realized losses put the nail in the performance coffin. And investors fled the fund in kind, helping to bring CGM Focus’ AUM from $10 billion to $3.2 billion as of the latest quarter.

But some of those redemptions may have been premature.


More from Stockpickr

  • Short-Term Risk, Long-Term Growth
  • Two Pair Trades for the Holidays
  • 3 Buffett Stocks Yielding More Than 3%
  • ----------------------------------------------------------

    With a revamped portfolio and unique strategic advantages (the fund’s charter allows Heebner to short stocks, for example), CGM Focus is starting a comeback. The fund has already rallied 26.93% in the last quarter, vs. only 11.31% in the S&P.

    With big bets in the automotive and travel sectors, now could be a good time to take a look at the stocks that CGM Focus is betting on.

    The fund’s biggest bet by far is Ford (F). With 43.5 million shares held, Detroit automaker currently makes up a whopping 19% of CGM Focus’ portfolio. That large position in Ford has already proven to be a good move, with the company’s stock price up nearly 67% so far in 2010.

    Those gains have come as a result of a complete makeover for Ford. The company has made significant improvements to its offerings in the last several years, bringing highly-sought-after models (such as the Fiesta and the European Focus) stateside to unify its product platforms and notch up its quality ratings. That move has paid off: Ford is currently the top-ranked U.S. automaker in terms of initial quality and reliability, and the company is selling cars at an accelerated pace.

    One of Ford’s biggest assets is its credit arm. Where competitors such as General Motors (GM) have been forced to add layers of separation between themselves and their finance arms (GM’s former credit division transformed into Ally Bank in 2008), Ford remains able to leverage its credit division to support its core business of selling cars. While that adds the potential for increased balance sheet risk, if used wisely it offers to be a major tool to put more Ford vehicles on the road.

    Auto supplier Magna International (MGA) is another major holding of the CGM Focus Fund (of note, however: CGMFX owns shares traded on the TSE). The Aurora, Ontario-based company manufactures vehicle components and performs vehicle assembly for a number of automakers (including Ford, above).

    While auto suppliers have seen their valuations fall in kind with automakers in recent years, Magna actually benefits from reasonably strong financial health. The company has a very manageable debt load and significant cash reserves as well as untapped credit lines. That makes this stock a best-in-breed instrument for exposure to the automotive sector right now.

    The financial pressures on auto suppliers are actually working in Magna’s favor right now. As competitors get squeezed out of the business, this massive company is first in line to snatch up contracts. Likewise, as automakers seek out contractors for new products, Magna’s size and financial health makes the firm an more attractive candidate even at the same pricing as less stable alternatives.

    The automotive sector isn’t the only place where CGM Focus is placing big bets -- there's also the travel industry. As with the automakers, the travel sector is only just starting to recover from the significant knocks it’s taken in recent years. And worst off have been the airlines.

    But that hasn’t kept CGM from making a 13.6 million share bet on Delta Air Lines (DAL).

    Following Delta’s 2009 merger with Northwest, the company is the world’s largest airline by fleet size, destinations served, and passenger volume -- a factor that should provide the new firm with significant cost efficiencies, estimated to be as much as $2 billion annually. Those synergies should help to free up free cash flow in the coming quarters, a necessity given the post-acquisition debt that the company is currently burdened with.

    While Delta does benefit from considerable liquidity, both in terms of cash and available credit, investors will want to see the company pay down some of its obligations in 2011. With recessionary headwinds waning, that should be a reality in the next few quarters. (PCLN) has enjoyed a monumental rally in 2010, with shares of the online travel site gaining 91% since the first trading day in January. Much of that growth has come at the hands of large pushes for international business that have increased the company’s top-line in Europe and Asia.

    Although rival Expedia (EXPE) does more than double the dollar volume of bookings that Priceline does, the latter benefits from better fundamentals and a stronger position outside of the U.S. market. As the U.S. travel industry works its way back to even, Priceline actually benefits as hotel and air operators seek to fill rooms and seats at comparatively low prices with online agents.

    That said, as consumers become willing to spend more on travel once again, we can expect some of those domestic partnerships to dry up.

    Regardless, Priceline’s growth story will likely continue to draw investors in 2011. Among them is the CGM Growth Fund; Priceline currently makes up 5.94% of the fund’s portfolio.

    To see the rest of the fund’s plays, check out the CGM Focus Fund Portfolio on Stockpickr.

    -- Written by Jonas Elmerraji in Baltimore.


    >>How to Invest in the Beatles
    >>Cisco Shares Find a Bottom

    >>Technical Setups: Nucor, Petrobras, Rite Aid

    Follow Stockpickr on Twitter and become a fan on Facebook.

    At the time of publication, author had no positions in stocks mentioned.

    Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on