Background
We have frequently been critical of Wall Street money managers citing high fees, high turnovers, and generally poor returns as examples. In the area of turnover we believe strongly in using time arbitrage and compounding to the do the heavy lifting of our investment returns. In general this has worked quite well. However there are times when turnover becomes a must - forced by a breakdown in our investment thesis or value and price are longer compatible. It is the latter in which we find ourselves today. After a nearly constant 5-year bull market we believe the markets are stretched in terms of general valuation. In our particular case several stocks have generated returns that - for reasons of valuation and their size in the portfolio - we have decided to reduce in terms of capital committed. We don't believe there is anything inherently wrong with these companies. To the contrary these companies are - on average - faster growing, more profitable, and generating better returns than most publicly traded companies. We will retain significant holdings in the companies for the foreseeable future.
The four companies involved in these transactions are the following (including transaction %):
1. Cognizant Technology (CTSH, Financial)
Sell 33% of our position
2. Novo Nordisk (NVO, Financial)
Sell 33% of our position
3. Synaptics (SYNA, Financial)
Sell 33% of our position
Doubling our position
After these transactions cash represents 14.1% of assets.
Corporate Information
Each quarter we review individual holdings in terms of projected growth, competitive moat, market drivers, etc. to assess each respective business case. Frequently during this process we will make minor changes to our fair value estimates. After this process is complete we will complete a risk assessment on each holding and make a judgment on adding, reducing or closing out the position. The following transactions are being taken after that process.
Cognizant Technology (CTSH, Financial)
In Cognizant's case we believe the stock is trading slightly above its estimated fair value of $60/share. It currently represents 7.6% of the portfolio. Since our purchase in November, 2007 the stock has gained 585% or a roughly 21% annual return. Senior executives have been selling at an increasing clip in Q1 and early Q2 2015. After these returns - and our future projections - we believe it's a reasonable step to reduce our position by roughly 1/3rd.
In Q1 of this year we reduced our position in NVO by roughly 40%. Since that time the stock has increased another 35% and trades at a roughly 15% premium of its estimated fair value of $48/share.
Since our purchase in January, 2006 the stock has gained 440% or a roughly 31% annual return. Much like CTSH, senior executives have been selling at an increasing clip in Q1 and early Q2 2015. After these returns - and our future projections - we believe it's a reasonable step to reduce our position by roughly 1/3rd.
In Synaptic's case we believe the stock is trading near its estimated fair value of $82/share. It currently represents 9.4% of the portfolio (our largest position). Since our purchase in April, 2005 the stock has gained 760% or a roughly 18% annual return. After these returns - and our future projections - we believe it's a reasonable step to reduce our position by roughly 1/3rd.
We believe the stock is currently trading at an 13% discount to its estimated fair value of $78/share. It currently represents 2.2% of the portfolio (one of our smaller positions). Since our purchase in April, 2006 the stock has gained a very disappointing 58% or a roughly 4.9% annual return. After adjusting our calculated fair value we believe it's a wise allocation of capital to roughly double our position in the company bringing it to roughly 5% of the portfolio.
As always, we are interested in hearing your thoughts and comments.
