2011 Second Half Preview
If March comes in like a lion and goes out like a lamb, June came in like a bear and went out like a bull, at least as far as the stock market was concerned. As it has so many times since it bottomed in March 2009, the stock market turned out to be a good place to invest just when things seemed gloomiest. This time it was an economic “soft patch” and recurring problems with Greek government debt that caused the anxiety and trepidation. Stocks fell week after week in May and June, and yet...things did not collapse, the 2008 or even spring 2010 script did not sickeningly repeat itself.

What to make of financial markets that once again pulled out of descent before significant damage was done? The word resiliency comes to mind. And maybe this is how it is supposed to be. After all, the investments we make, at least here at Arrival Capital, are in real financial entities with hard assets or valuable brands and know how. Investments in firms like these should not veer up or down depending on the whims or nervousness of investors focused on factors having almost nothing to do with the inherent value of enterprises in which we invest.

As conditions normalize even if still not quite “normal”, selloffs become opportunities to make investments in valuable entities that have come down in price due to exogenous events. But value remains unaffected, indeed value becomes enhanced and chances for meaningful profit increase as the prices of pre-selected and already researched stocks come down.

That is opportunistic investing merged with value oriented investment analysis. A recent case in point is Nike (NKE). Back in March the company reported a less than stellar quarter but indicated that future orders remained brisk. On a whole list of metrics, the stock and company appeared fundamentally sound. Yet the stock sold off hard. We soon after began buying this iconic brand in the high 70’s for clients. Because of the fundamental value of Nike, the company’s stock did not fall any lower as the market in general began its sell-off in May. This is value investing providing a margin of safety against tougher investment climates. Cheap but valuable things tend not to go much lower. Next, in late June, Nike reported a terrific quarter highlighting the tremendous power of this global company. The stock price quickly made it back to its all-time high in the low 90’s. This is value investing harvesting the appreciation that takes place when real value is finally appreciated in the marketplace (it usually takes a little longer than three months.)

The heart of Arrival Capital’s approach is to build a diversified portfolio of positions that can act like Nike has recently. Buy good value at cheap prices. Put in place that inherent downside protection yet set the stage for meaningful appreciation as value is recognized and enhanced. Complement a value-oriented portfolio with positions anticipating economic and/or global trends in areas like commodities, currencies and/or interest rates, and we have what we believe are cost effective, prudent yet powerful portfolios that can withstand the test of time and changing economic conditions to produce real wealth for our clients.

The second half of 2011 is bound to have it setbacks, bouts of pessimism and maybe even a day or two of panic. But the underlying resiliency of the economy should continue to form a foundation upon which productive people and businesses worldwide can continue to create value. Arrival Capital will be there to capture some of that value for our clients.
- posted by Jay @ 9:01 AM