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Another Value Favourite Gone:

Back in April of this year I purchased a stake in PTNX with proceeds from the sale of a water heater trust bought out by private equity. Today that stock, Printronix, was purchased by Vector Capital for $108M or $16.00/share. On an original purchase price of $13.80 I stand to make a gain of just under 16% on the purchase.

Two friends were ecstatic this morning when I called them to share the news, yet to me I was both disappointed and a little annoyed that another one of my closely followed stocks had come under the gun of M&A activity this year. While most investors would quickly book their profits and move on to the next opportunity, I found myself unimpressed. It’s not that I wasn’t happy with the premium over what I paid for the stock, but the fact that I am continuing to find myself with the problem of finding quality value in this market. So far this year my picks have either appreciated significantly & been sold into strength or bought out at substantial premiums. While an almost 40% gain is more than many investors could dream of, I’m also left with the problem of re-allocating cash to the remaining holdings at fair or high value OR sitting on cash until I find better opportunities.

The real problem is that I’m not finding the same type of value I have over the past 12-16 months. The MoS needed for initiating a position in a new holding is significantly higher than my risk tolerance and sitting at 25% makes me feel as though I’m missing opportunities elsewhere, but unable to figure out where those might be.

The market has also rebounded significantly in the face of much adversity, but just how quickly and with what ambition it has rebounded worries me. I’m not the type of investor to preach negative views about the doom & gloom of the markets perils it might possibly be facing. In all actuality, the market appears to be functioning beyond expectations. But there’s enough underlying concerns in a few areas to keep me cautious enough that we’re likely to experience what I stated earlier this year.

I expected a correction of the same magnitude as May of 2006 and we experienced that in August of this year. But when I ran my screens, pulled up my watchlist or checked my limit orders on specific names, I quickly realized that the pullback didn’t affect much of the quality companies in the market. We’re now likely to begin the classic fall run up in the markets that many are accustomed to taking advantage of. But while many are excited about the prospects of making gains to neutralize their losses from the summer, I look towards January & February with a lot of uneasiness.

But value IS becoming more scarcer and needing more investigation to unearth it. There is always the option of injecting cash into existing holdings, but I then run the risk of increasing the allocation of some well beyond my own comfort level (some are already >5%).

Cash in hand is never easy to deal with because you’re always looking at others and saying to yourself “I could be them”. But at times like this, I’m glad that I’ve developed patience and the uncanny ability to trust my business instincts. The market doesn’t feel right to me and it’s even more troubling that I can’t tell you exactly why. The feeling is just there, it’s been there for a while and it’s not going away. Some people might think I’m being overcautious, too young to see the real behaviour of the market & where it’s going…but more often than not when I’ve gone against my instincts I’ve learnt the hard way.

I’m a little sad to see PTNX go so early, especially since through my research I saw such promise and potential in its management to grow the company and its valuation. Obviously Vector saw something others did or saw some advantage they could exploit by taking the company private. I just hope that my continued efforts to find value don’t put me into a position where I feel I NEED to make a purchase with idle cash just for the sake of using it.

I know I’ll continue to exercise caution and patience as I did with my DivG portfolio and the quality I picked up in August during the selloff. I’ve also realized that portfolio turnover may be something to concentrate on and finding companies with longer-term prospects than the ones I’ve concentrated on over the past year.

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