Raising Cash: Sold XYL and ITT
I have closed out my positions in Xylem and ITT (2 of the 3 ITT spinoff companies) to raise some cash. The market is up substantially from its October lows and I think it’s time to trim the portfolio a bit. I’m also trying to move to a more concentrated strategy with only 10 to 15 positions.
Of the three companies coming out of the ITT spinoffs (Xylem, Exelis and the ITT stub) I decided to focus my attention on Exelis in the weeks after the spinoff; it was the company who’s shares traded down the most post spin and seemed the most undervalued.
Xylem never interested me that much, perhaps because management was seemingly trying to position the company as a ‘story stock’: “Water, the business of the future”. I had targeted my usual one year minimum holding period for XYL, but my need to raise capital and clean house together with Xylem’s recent announcement that they are in a trademark dispute over the corporate name made this an easy elimination. Is it possible that after spending I-don’t-know-how-much to come up with a new corporate name, management didn’t check (or check exhaustively enough) to see whether there was already someone out there using the ‘Xylem’ name who might object to their using it? Not only does this oversight undermine my faith in management’s basic business skills, but the dispute may result in management having to spend considerable time and effort, not to speak of money, to resolve this issue at a moment when they have little to spare. While apparently a small detail, I take it as possibly indicative of potentially other problems to come. I was also surprised that Mr. Market did not warm up to XYL’s story after the spinoff; the shares have underperformed the market since the spinoff and are up only 4% since my purchase in August. Perhaps it is more a question of patience, but I feel there are better opportunities in the offing.
The ITT stub (what was left over after the spinoff of XYL and XLS) is perhaps the most intriguing of the three post spin companies. Remember, this is the company with the smallest market cap of the three, yet the company at which the former ITT
president CFO opted to remain with as CEO. Unfortunately, it is the most difficult to analyse, at least until the 2011 10K is released. The spinoff documents provided pro forma financials for XYL and XLS as well as business rationale and outlook. Nothing similar was provided for the ITT stub which is comprised of a hodgepodge of businesses left over after the others were spun off. Of course one can create the pro forma financials, but one is left without the accompanying notes and management insights into the business. And with the smallest market cap of the three ITT children, the ITT stub was too small a position to maintain in my portfolio. Within the first month of the spinoff, I made the decision to make XLS a full position and eliminate the other two when the post spin selling pressure eased. The ITT stub is now up close to 30% from my cost basis and it’s time to move on.