There is a difference, you know, between placing a trade and initiating an investment. As part of the framework around the construction of an investment thesis, it is important to determine what the goal really is. Ask a few simple questions: What is the point of investing in this security? Is it for long-term gains? Do I have a specific plan in mind? Is this just to make money? Is there a well-articulated and concrete exit strategy?
It may be helpful to ask these simple questions as we navigate through this uninterested late summer market. If questions about trading vs. investing are answered honestly, we may not "force" any action at all. This, actually, turns out to be the mature thing to do most of the time.
As an example, I will go back to my first best idea, Harsco Corporation (HSC) . I initiated this position as a definitive investment. I associated myself with near-term business fundamentals, which admittedly in a couple of its businesses are still quite poor. I realistically determined the value of the company's portfolio of assets vs. liabilities and ascertained that there is substantial long-term value still to be harvested. I looked at the risk-reward levels and discovered that there was a giant margin of safety in the $6-range.
I have a clear view that this portfolio of companies can be harvested for $20 per share, by my estimation, in an acquisition by private equity. Or, if that doesn't happen, the company has publicly articulated the desire to hive off a couple of the capital-intensive businesses in exchange for expansion of the its industrial and/or rail portfolio. I have a clear exit strategy, within a reasonable time horizon. Despite the stock's recent move, we haven't realized many of the larger catalysts at play, so I haven't sold. This is an investment.
Now, what about a trade? Yesterday, I wrote that I think the housing suppliers were due to take a breather. I will take Owens Corning (OC) as an example of a potential trade -- one that I have not initiated yet, though. After analyzing the OC data after the most recent quarterly report, I ascertained that there wasn't much more upside from here. The stock has had a brisk move, but the company's sales guidance, especially for the insulation segment, disappointed me for the balance of the year.
This, in my constructed mosaic for Owens Corning, is the biggest single long-term value driver. With sales slower than I thought they would be and margins flattening, I would be interested in selling and/or shorting OC for a trade. The near-term fundamentals are not supportive of the stock's recent move, in my opinion. I concoct a risk/reward framework, in this case, of not a lot of upside from $54 and 20% downside, and may navigate appropriately.
Credit Suisse agrees this morning, having initiated on Owens Corning with an Underperform rating. I wouldn't plan to stick around very long, maybe a maximum of six months, if one of my investment thesis is a trade. It would be just to rake in some dollars while I'm supporting my longer-term investments in a reasonably diversified portfolio.
