For value investors, the "buy" decision, at the outset, may seem to be the most difficult call to make. We peruse thousands of companies, hone down the list to a manageable number based on the fundamental criteria we find most compelling, and ultimately probably pull the trigger on just a handful over the course of a given year. We hope that our analysis was not flawed, that we did not miss something material, or that we did not paint an overly optimistic picture of the sometimes-distressed situations we gravitate toward.
We do not expect instant gratification; some situations take years to play out. That's an eternity these days, but we are just wired that way, patient until the end, and sometimes to our detriment. We have to be careful about not falling in love with an idea; that can blind us to the truth, lead to wishful thinking, and cause us to hang on to a name far too long.
The harder part, in my view, may be when to close a position. This is especially true when it plays out much quicker than you'd anticipated. When you are buying damaged turnaround plays, as I often do, you are usually early to the party, buying shares the growth crowd is selling at distressed prices. If you are correct, the name turns around and/or the market realizes that it overly punished the name, and investors begin to plow back in. At that point, you may be faced with a decision, sometimes more quickly than anticipated.
Being early to the party sometimes means that you are also among the first to leave, selling a name that has rebounded while it is still enjoying the momentum of renewed interest. That's something I've come to accept as a value investor; if you make money on a trade after deciding to close the position, you need to walk away and not look back.
All of the above perfectly describes my position in Fossil Group Inc. (FOSL) , which I took in January in the mid-$8 range. I never set de-facto price targets; I may have an idea of what I think a company is worth when I purchase it, but don't have a hard and fast rule. In Fossil's case, I believed it was potentially a double, but not a quick one.
Just five months later, Fossil is up nearly 300% thanks to some initial takeover speculation in February that drove shares to $17, then a KeyBanc research report early this month that put a $32 price target on the stock.
With decision time for me, I closed the position this week. It was not an easy one to make, nor was it the only option. I could have sold a portion of the position, played the trailing stop-loss game, utilized options, or a combination of the three. Instead, I decided to take the money and run and look for the next one.
I again may be a bit early to leave the party, but that's OK. Situations rarely unfold this quickly in value land, and it's a good outcome no matter what.
