I generally don’t use macro analysis in my investment process, and, as you know if you’ve read some of my other posts, I don’t believe in timing the market or letting charts tell me when to trade in or out of a stock. I am, at heart as well as intellectually, a value investor; I look for the proverbial $.40 dollar. And I know that I’m going to buy that $.40 dollar just before it goes to $.20, but I don’t worry about it. Through gritted teeth I try to think of that further 50% drop as an opportunity.
Recently, however, I’m feeling a bit negative on US equities. I’m not exactly sure why. Yes, the net-nets that one could find abundantly in early 2009 are long gone. But there still are some interesting value propositions out there despite the run-up over the last two years. Maybe it’s the rarefied atmosphere up here at 2x March 2009 prices. Maybe it’s just my recent experience with the Seahawk Drilling investment, or last week’s sudden drop in response to the Libya situation. Whatever it is, I’m feeling far less comfortable with my equity holdings these days, and I’m tempted to retreat a bit from the market. However, each time I think about moving more into cash in the face of this ever upward-grinding market I get slightly nauseous. Now you might think that is bad, but, in fact, it’s just the opposite! My best investments are made when I have to force myself, when entering that buy order makes me almost physically ill. With last week’s slight market retreat my nausea retreated commensurately, but, I’m willing to wager, it was only temporary. The Bernanke floodgates are open, we’re in the third year of a presidential term, the economy is expanding and the equity markets are not that overvalued after all so why would we have a market downturn? Exactly!
But then it struck me. What I’m unhappy with is that I can’t find any situations where sellers are selling because they HAVE to, not because they want to. The truly great investments are made when the buyer HAS to sell, regardless of price. So what I’m truely worried about is not that the market might be overvalued here, but rather that I don’t have extra cash, or at least not enough extra cash to take a significant position, should a real bargain present itself. And you know that the real bargains ONLY present themselves when you don’t have enough cash. Ergo, gotta raise some. There are some interesting situations coming down the line, the Marathon Oil split up, the ITT split up, the SaraLee recap and split up and, last but not least, the CVRs from the Genzyme acquisition. I think this latter has all the characteristics of a potential home run a la Greenblatt; merger securities, not easy to understand, small value relative to the overall deal.. lets just hope Mr. Market offers them to me at the right price.
So what do we sell off? The broken eggs for one, HAWK, if it gets into the $5 to $6 range; I think the upside potential has been or will be stripped during bankruptcy if the HERO deal goes through. Then there are the orphans, that is, shares in companies where I was unable to build a full position because the share price ran up too fast after my initial purchase. Here I include, KSP, AVTR and HHC. Don’t get me wrong, it’s not that the fundamental investment thesis for these companies has changed. I still think they represent good value, though perhaps no longer great value (But what do I know?). It’s just that it is no longer compelling for me to create a full position at current prices. [This is part of my ongoing battle to limit the number of positions in this portfolio to a manageable number, something I’m hard pressed to do.] And finally there are those current positions where the prices are getting near my original sell targets; I’ll be lightening up on ASCMA in a point or two, and BBEP is nearing my sell range. With the sale of these (and a few other positions I never got around to sharing.. sorry) over the next month I’ll be building my war chest. I would like to be at 20 to 25% cash by the end of the quarter if Mr. Market will indulge me.