Time for my most recent portfolio changes. The reshaping is complete, here is the data file and here are the qualitative details:

Buys

1. Arkansas Best [ABFS] — Inexpensive, and trucking is out of favor. Trucking should pick up with the economy in the second half of 2007, and as the dollar cheapens, trucking is needed to get the exports to the ports.
2. Deutsche Bank [DB] — Cheap major European bank. I’m light on financials (though if I lost my restrictions you would see a lot of insurance in my portfolio). 9-10x earnings for the next two years seems too cheap for me. Can they have that much exposure to the same problems faced by Bear Stearns? Maybe, but the valuation compensates for that.
3. Gruma SA [GMK] — Inexpensive, and a play on the growing middle class in Mexico. Also a play on the growing popularity of Mexican food in the world. I don’t have a lot in consumer staples, so this helps.
4. Mylan Labs [MYL] — returning to a name I last owned in 1988. Inexpensive generic drugmaker. I have nothing in healthcare, so this diversifies me a little. Generics are unlikely to fare badly as the branded pharmaceuticals should the Democrats win in 2008.

Sales

1. Sold Komag [KOMG] because of the merger, and the arb premium (amount of incremental gains from holding on until deal consummation) was less than what I could earn in cash.
2. Sold St. Joe [JOE], and I wish I had sold when one of my colleagues explained their likely troubles to me one month ago. St. Joe is going to have it tough for a while because they don’t have a lot of ways to generate cash, without selling property, and the land market is not as good as it was two years ago.
3. Sold Sappi [SPP]. The glossy paper market, like other fiber markets faces their share of challenges. Demand is sluggish, and likely to stay that way for a while.
4. Sold a little of Lafarge [LR]. Still have a position there. It’s had a nice run, so I rebalanced down to my normal target weight.

With these moves, I am back to 35 positions, up from 34. I am running with 16% cash, which is high for me. At the beginning of the year, I reinvested and brought cash down to 5% of the portfolio, but good investment results, combined with rebalancing has brought the cash back, and then some. If the cash hits 20%, I will raise my normal portfolio position size, and move cash to 10% or so. Maybe we get a pullback?

What I did not sell

1. SPX Corp — the turnaround continues. For now, honor the momentum.
2. Noble Corp — Hey, I just bought this last during the reshaping; I am not kicking it out so soon, no matter how well it has done.
3. Sara Lee — the turnaround continues. No momentum here; maybe management will succeed. A few of their ideas seem to be on target.

What I did not buy

Many more entries here. As I worked down my list, I kept saying, “Cheap for a reason… cheap for a reason…”

1. Too small: Charles and Colvard, PAM Transportation
2. Don’t care for the industry: Chipmos Technologies, Finish Line, Foot Locker, Encore Wire, First Consulting, Freightcar America, Korea Electric, and Metrogas
3. Already own something that I like better in its industry, and don’t want to increase exposure: Crystal River and MVC Capital (both interesting, though I like Deerfield better)
4. Irregular operating history: Optimal Group and Northgate Minerals
5. Tyco International is not as cheap as the data would indicate because of the recent spinoffs.

After I finish this, I will adjust the portfolio over at Stockpickr.com.
Full Disclosure: Long SPW NE SLE LR GMK DB ABFS MYL

This entry was posted on Thursday, July 5th, 2007 at 11:45 pm and is filed under Best Articles, Industry Rotation, Stocks, Value Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.