Bear Market Rallies and Opportunities

When the general market rises on a hope and a dream rather than any tangible fundamentals, I use the opportunity to sell some of the companies I've been holding that meet any of the following criteria:

• the share price is at or near the target (usually 90% my estimated fair market value)
• the management, business plan or prospects for the business has changed materially and most likely, permanently
• Mea culpa--->I identify a mistake I made in the original analysis that either significantly diminishes the FMV of the company or makes it too difficult to determine.

With the recent rally (and even more recent crushing of that rally), I had a good, long look at my portfolio and decided which positions I should pare down or exit completely.

PHG-- Royal Phillips Electronics-- I sold my entire stake for a loss of 40% (not including dividends collected over 18 months). Compelling valuations, a generous dividend and the "green" angle (the LED arm) were more than offset by the inherent complexity of a large conglomerate, onerous competition (like GE and Siemens), a deteriorating balance sheet and a management that had a questionable record of execution. Although I liked what I saw initially when I first evaluated this business, I overlooked how complicated its corporate structure was and I certainly didn't have a feel for the committment and long term goals of the management. Mason Hawkins obviously doesn't agree and has increased his stake to 28M shares in December

UNH-- United Health Group (an HMO)-- I sold my entire stake for a gain of 30%, not including dividends. Very attractive valuation and what I thought was a overblown market reaction to political risk lead me to take a position. I sold because of a continuously deteriorating medical cost ratio, management with shaky ethics (I value reputation and this is one of the most hated companies in the world... hated by its customers!) and increasing competition from UNH's not-for-profit peers who will likely be more favourably treated in the upcoming reform measures (if they actually happen). I notice that many of my favourite gurus have sold recently as well including Warren Buffett, Seth Klarman, David Einhorn and Jean-Marie Eveillard.

LYG Lloyd's TSB Group and HOG Harley Davidson have both been thoroughly trashed but I continue to hold on to my stakes (despite the termination of the dividend in LYG and the cut in Harley's) as I remain to be convinced that either business will completely fail and instead emerge down the line in even a more dominant position than prior to the crisis. I am considering adding carefully to both positions although I'm more likely to do so for HOG than LYG. Buffett's almost usurious loan to HOG makes it less likely that their financial division will drag down their rather decent balance sheet. LYG's fate seems to be less to do with the market and what a solid, conservative bank it used to be and more to do with backroom deals with the UK government who pushed them into the HBOS merger and then on to the possibility of nationalization down the line. It's really impossible to have an edge in this kind of situation so I'm going to have to think long and hard about what to do about LYG.

Recent new positions:

LUK Leucadia National at $14

BLZ.TO Belzberg Technologies at $1.75

FTP.TO Fortress Paper Ltd. at $4.60

Addition to existing positions:

BBSI at $9.00


I'm actively researching:

IIC.TO Ing Canada
JOE St. Joe Company
BIP Brookfield Infrastructure Partners
KSW KSW Inc.
BNI Burlington North Santa Fe railroad

More on these later....

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