2012 Investment Agenda

As part of my 2012 investment agenda I intend to focus more on the sell side instead of the buy side of my investment analysis.  Over the years I have found that I have a keen sense of identifying value investment opportunities; however, I tend to hold onto investments for too long of a period.  Part of the reason for this is that while I am planning to make an investment, I actually avoid conducting the ongoing diligence necessary to make strategic selling decisions.  To date, I really have not been penalized for this oversight.  Overall I am happy with the returns that I have yielded since initiating my portfolio in 2007.  The importance of this analysis though is critical to truly optimizing the returns of my portfolio, particularly when considering duration, market volatility, and changes in the business fundamentals.  Below is an outline of my 2012 investment approach that I plan to implement to avoid falling in love with the equities that I have deemed to be "cheap".

1. Develop working valuation models for all of my investments that will be updated and evaluated quarterly
2. Downsize portfolio to manageable number of investments (12 to 8)
3. Conduct ongoing analysis of management
4. Establish annual sell price targets (execute where necessary)

In addition to my investment sell agenda, I also plan on continuing to implement many of the techniques that I have used over the last couple of years to identify cheap companies.  Overall, I have been fairly fortunate to find them by using a variety of online websites and resources.  I do not expect that in 2012 that there will be a shortened supply of value opportunities.

Over the next 12 months, I will post the results of the results of my analysis for my current holdings as well as the investment strategy that I plan to deploy.  AZZ was the first example of this and I believe that it turned out quite successfully; however, in the future I am going to be aiming for higher returns with an equal or lower risk profile.

Value Investment: AZZ Incorporated (Update)

Within my September 28th, 2011 blog entry, I provided a detailed analysis of AZZ from an operational and financial perspective.  Since the last blog entry, AZZ has seen material price appreciation in the market.  When I wrote my original entry, AZZ had been trading at approximately $38.04 per share and is not currently trading at $48.77.  Over this period of time, investors would have yielded at least 28% in less than 6 months if sold today.  While not nearly as impressive as I was hoping for, below I have included a few of my key learnings and observations from this investment:

1. Non-catalyzed businesses canexceed intrinsic value with broad market upturns
• It is generally assumed that a business catalyst is required to achieve intrinsic value and market value convergence, however, I believe that broader market moves can accelerate value realization as a replacement for a tangible catalyst.  AZZ is a perfect example of how a broader market move can accelerate value accretion in undervalued investments.  Over the period of September to February, there have been no significant press releases or organizational changes to realize a material appreciation of ~30%.  At the market close on 9/28/2011 AZZ traded at $38.82 and on 2/13/2012 it traded at $50.12 for a return of 29% during the investment period.  During this same period the SPY (S&P Index) traded at 135.36 and 115.14, for an equivalent return of 17%.  Clearly most of the variance of the two can be explained through variations in the risk profile of the S&P and AZZ, however, without market movement it is difficult to know whether not a material movement in the stock price of AZZ would have occurred.
2. Trading volatility within intrinsic valuation ranges can be profitable
• Over the last 3 months, several opportunities had arisen to increase or decrease the size of my investment position in AZZ.  Unfortunately, I was either late to pull the trigger or limited in my ability to free up capital from several of my other investments.  Without major fundamental changes to the business, significant opportunities will arise from time to time for enterprising investors to trade around intrinsic values.  In late September AZZ traded around $38.82 and then appreciated to $46.77 per share by 10/27/2011.  If I had been keeping up to date with the markets I would have sold my position at this juncture and then reinitiated on 11/25/2011 when the stock declined back to $38.02.  This would have allowed me to compound my returns to sell on 2/3/2012 at $52.44 per share.

Overall, I am still comfortable with my return in AZZ.  I recently sold out of my position in AZZ; however, I plan to continue to trade in and out of this position within my previously stated valuation range.

Disclosure: No position in AZZ.