Because discussing my personal holdings has become quite simplified in the last month, I’m going to be leaning more on two other things I’m involved with – one being the Marketocracy.com virtual portfolio, and the other being the Boston College Investment Club portfolio.

Because Marketocracy has diversification rules (for the weak, I know), I have to maintain a number of holdings – but I’m pretty close to the minimum with 11, as I run an aggressive portfolio. Year-to-date, I’m up 9.5% against a 10.4% decline for the S&P 500. Essentially all of that comes from this quarter, where I’m up 22% after buying up Primus common (PRS) and senior notes (PRD) close to the concentration limits. Read more in the Primus Guaranty Stock Report.

My next largest position in Accenture (ACN), a consulting company that has seen increased demand in a soft economy thanks to its ability to cut costs. They have $5.60/share in cash with a $41 stock, and will probably generate another $3.75/share in cash flow this year, giving them an FCF multiple below 10x. With a countercyclical growth story and an inexpensive valuation relative to earnings estimates that continue to rise, Accenture has the chance to catch a wave of institutional support.

I lump my next two holdings together as small-cap biotechs, even though the rationale is quite different. Exelixis (EXEL) is a gamble on the company’s deep, though early-stage, pipeline; my concern now is that in an environment where capital raising is difficult and costly, the stock isn’t worth owning. Another big selling point for Exelixis was its partnership approach with major pharmaceutical companies, though at least one company looks set to end that arrangement. I’m thinking of cutting this out of the portfolio as a lesson about not all risk-taking being equal.
The other biotech name is PDL Biopharma (PDLI), which was the subject of an intense activist battle by Third Point hedge fund manager Dan Loeb back in the day. Although Loeb eventually gave up his battle, I believe his underlying thesis was correct – on a sum-of-parts basis, the company looks undervalued. Seth Klarman’s Baupost Group added substantially to their stake in this name during the last quarter.

Another holding that I talk about here frequently is Ingersoll-Rand (IR), in which Berkshire Hathaway (BRK) increased their stake materially during the last quarter. As I’ve said for several months, Ingersoll has transformed their business into a diversified mini-conglomerate with steady and profitable revenue streams. Even so, I’ll admit that I didn’t fully appreciate the great collection of business lines until I read a recent note from KeyBanc. Consider:

Trane: #1 US, #2 Worldwide in Commercial HVAC Equipment
Thermo King: #1 Worldwide in Transport Refrigeration
Hussman: #1 in North America, Display Case Provider
Schlage: #1 in North America, Lock and Door Hardware
Club Car: #1 Worldwide in Golf Carts
Ingersoll-Rand: #1 in North America, Air Compressors and Tools

Now, there is near-term uncertainty with some risk related to merger integration, related synergy and tax issues, and the potential drag of dampened commercial construction, but I think that’s the reason the stock is trading just over 1.1x book value. This looks to be the kind of uncertainty you buy, because the underlying businesses are just so good.

The next holding is an ugly name – Avatar Holdings (AVTR) – a stock that I initially got involved with because it looked so cheap around .65x book. Avatar owns 17,000 acres of developable land in Florida and Arizona, as well as another 15,000 acres of land that is currently non-developable. Avatar has ample liquidity, and even excluding all of the non-developable property, are valued at a around $13,500/acre.

I own a pair of contract research organizations (CROs) because the requirements state I need to be at least 65% invested at all times; I was non-compliant and needed to make a quick buy. I plan on rotating out of these and into something I’m more comfortable with – maybe more IR or ACN, or perhaps add some insurance stocks at multiples of book of less than 1.1x. While that might not sound like something befitting an “aggressive” portfolio, I’m more inclined now to move away from an outwardly risky posture (i.e., biotech) to more concentrated positions that I feel more comfortable about. Hopefully this marks a sign of my investing maturation…

Rounding out my holdings is Headwaters (HW), which – one of these days – I really will get around to doing a full write-up on. I put it on the backburner for a couple days, they reported earnings, and the stock has been up about 50% since then. Headwaters did amend the covenants on a loan facility, ostensibly to enhance their capital position in a weak climate. With substantial exposure to buildings products, not to mention the regulatory and political hurdles the company has faced in the last 18-24 months due to an incoherent national energy policy, the debt they’ve carried has always been a concern for me. Overall, though, I’m impressed with their execution and like the business model. I consider it a building products company on the cheap, with a call option on some interesting alternative energy exposure via coal and heavy oil upgrading.

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