As we head into the unofficial start of summer with the Memorial Day weekend we are also completing the unofficial first period of the 2007 stock market, which begins with the New Year and goes on through the Winter and Spring. For Arrival Capital clients, 2007 has been a very good one thus far after a strong Spring rally. Up to this point in the year, most market averages are at new highs amid a continuation of trends favoring companies that produce machinery, materials, and energy for a rapidly developing world economy, the kinds of companies Arrival Capital has been drawn to for the past few years. The U.S. economy has slowed but not stopped growing, businesses are generating cash, and stocks have risen. The late February sell-off is all but forgotten, and now it is unbridled optimism rather than “get me out” pessimism that is one of two big enemies of the successful investor.

Somewhat surprisingly, the other big investor demon is a kind of acrophobia as markets ascend. More than one Arrival Capital client or friend has expressed concern about holding onto stocks as they go higher. No one, after all, wants to get caught up in another 2000 style bubble and leave a small fortune on the table. How to fight the urge to come down from the ledge and sell stocks just because they have gone up? This is where some quantitative analysis comes in handy. Nothing is foolproof, naturally. But a walk through a typical Arrival client’s portfolio will show almost all stocks, even ones that have gone up dramatically, sporting price to earnings ratios comfortably in the mid-teens, a far cry from the outlandish ratios seen in the bubble stocks of the last days of the last century.

It is near impossible to call a near term market top. What is possible is to create and maintain a portfolio of attractively valued investments that can continue to generate the cash returns that will provide a level of support if the market takes a turn down. Of course, at some price, almost any stock will not be worthwhile to hold. As your eyes and ears in the market, Arrival Capital looks at every stock in a portfolio everyday just in case such a point has been reached. But the reality is that well-run companies are, for the most part, constantly evolving entities that can improve over time and thus become more valuable over time. It is that qualitative measure plus a quantitative “reality check” that we find most useful for deciding when to get out of a stock or hold on for the future

Although we hesitate to use these updates to highlight a specific stock, it is sometimes useful to see in real time how value and/or contrarian investing can be useful to find an investment and yet how hard it can be to fight off the crowd and make the purchase. A case in point, coffee seller Starbucks (SBUX). Trading at a 52-week low even as the overall market has soared, there are a number of reasons people are down on SBUX — slowing sales growth, higher dairy costs, a general fatigue about the brand. Yet just a few months ago, people were trumpeting their plans to open 10,000 stores in China over time. To us, the fundamentals of a respected and valuable brand remain in place as well as a great ability to generate future cash for shareholders. We are buying SBUX for clients here, even though it is tough to do so when so many other stocks are soaring. In the end, that may be what market-beating investing is all about — fighting the crowd, at times, but doing so with limited downside and legitimate reasons to hope for a better tomorrow.

Have a great summer