It has happened to all of us. For some reason, a particular company can become the darling of an investment portfolio, even if the share price relative to value begin to converge on one another. Because investing requires one to allocate scarce resources ('aka cash') into investment securities, investors must always assess price relative to value and only invest in the best ideas.
For me, I've been a bull on shares of Vivendi (OTCPK:VIVHY) since April 2012, when the company made fresh decade lows. While the share price has risen significantly since then, Vivendi is no longer a screaming buy in my opinion. Yes, I think the shares are still undervalued. And certain restructuring activities are on the way, including the de-merger of SFR, its struggling French telco unit from its "asset-light" media properties, Canal+ and Universal Music Group.
However, even with a significant number of positive news events, Vivendi remains stubbornly undervalued. I think 2014 should be a good year for Vivendi, given it has significantly reduced its debt load and sold off two of its non-core businesses, Maroc Telecom and Activision Blizzard (NASDAQ:ATVI). The exiting CFO, Philip Capron, recently indicated that with its new flush cash balance, Vivendi has a number of ways to reward shareholders, either through a special dividend or share buybacks. I am hoping that an announcement of shareholder remuneration is a near-term catalyst that allows me to sell my stake at premium prices (relative to the quote today).
Having said that, being a contrarian and buying out of favor stocks is only good insofar that the greater investment community eventually agrees with you. That's why paying low prices with actionable catalysts is key to the investment process; something other than broad market movements becomes the source of investment returns.
Fighting against the crowd can be like swimming against the tide. If the current is too strong, playing contrarian can tie up capital in ideas that won't produce timely returns.
One must always consider the opportunity cost of holding a particular investment. For me, Vivendi has been an adequate investment over the past 18 months, including significant cash dividends paid annually. However, the price to value gap has narrowed and I am finding more compelling bargains elsewhere in the market, with a lighter current to swim against.
My resolution for 2014 is to only own the most undervalued securities I can find and understand, holding cash otherwise. I have found companies that I believe are a better risk/reward than Vivendi, so I will be looking to lighten up on the French conglomerate and to funnel capital into my best ideas. After all, owning companies that trade at a 50% discount to an estimate of value is better than owning companies trading at a 20% discount, all else being equal.
For 2014, I will focus on falling out of love with my investments when the facts dictate. Portfolio management is a never ending process, and each day I'm learning to become a better investor. Being able to break up with an investment is a skill worth its weight in gold.
Good luck to all in 2014.