Staying centered in the market storm

The stock market is just that, a market. The dynamics are no different from a buzzing street bazaar, with buyer and seller enthusiasm ebbing and flowing with the emotions of the day.

Our focus is on the long-term merits of companies with multi-year event-driven transitions, and we pay attention to the long-term value we receive.

Exit economics

As long as our expectations for the end-of-transition scenario, or “exit economics,” remain intact, we will endure the volatility in both the share price and near-term fundamentals.

This unfashionable near-term volatility is what periodically can push investors away from the transitions stocks that make up our portfolio.

Large cap stock market index prices were flattish at best in the third quarter, with small-cap and mid-cap indices recording sizeable declines.

The share prices of our holdings in the Smidcap Value portfolio were not immune to this broad market price volatility.

Combined with the emotions that surround our companies’ near-term prospects, our portfolio can produce quarterly returns that have relatively low correlation to the benchmark index.

Energy selloff

Our portfolio returns in the quarter were significantly impacted by our energy-related holdings.

Although our energy companies continue to execute on their event-driven transition strategies, their near-term share prices were prey to investors selling off their exposure to falling oil and gas prices.

High position concentration and low turnover are integral components of our strategy. At the end of the third quarter, we held 33 stocks. Year-to-date turnover has been 29.7%.

We purchased three new names in the quarter: Cabot Microelectronics (CCMP), Darden Restaurants (DRI) and CBS Outdoor Americas (CBSO).

Cabot Microelectronics, a producer of supplies to semiconductor companies, is undergoing a product transition that will restore strong growth to its currently mature business.

Darden Restaurants is being pressured by an activist investor to change its senior management and implement a broad-based operational turnaround.

CBS Outdoor Americas is an outdoor advertising (billboard) company recently spun-off from CBS Corporation with some very shareholder-friendly attributes.

Micron Technology

We sold a few stocks in the quarter: Micron Technology (MU), Rockwood Holdings (ROC) and Post Holdings (POST).

In my opinion, Micron was a holding that successfully completed a remarkable transition from a depressed company to a market darling.

Post Holdings became impaired as management stumbled in its acquisition-driven strategy, resulting in weaker underlying profitability and an over-extended balance sheet.

Photo Credit: Mattys Flicks via Flickr Creative Commons


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DISCLAIMER: The investments discussed are held in client accounts as of October 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

The post Staying centered in the market storm appeared first on Smarter InvestingCovestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at