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Two of my positions had big moves yesterday, Lyondell Chemical Company (LYO) and Assurant, Inc. (AIZ).

Shares in Lyondell Chemical soared on a takeover announcement by Basell yesterday. LYO had been my best performing position for the last several weeks, so I wonder how much pre-announcement accumulation was going on. Of course I wasn't privy, I bought the stock based on my model's assessment of the stock's attractive relative valuation, growth and sentiment indicators.

My usual policy with takeover announcements is to see how high the price goes relative to the buyout price. If it lags, then usually the arbs are just betting on a respectable return until the deal completes, and I sell (to them?). If the price is higher, then the market thinks the deal is undervalued or others might step in. Then I'll wait a bit too, but will eventually sell as well and look to redeploy the proceeds in what my models think is the next best candidate. Right now that looks like Freeport McMoRan (FCX) due to its attractive relative valuation, growth and expectational properties.

LYO 1-yr chart


On the downside, Assurant got drilled by the announcement of some shady behavior of several top executives. If they did wrong, then put the screws to them, but I wonder if the intrinsic value of the company was truly eroded by over 13%, which is what the stock had declined as of this post. Sure it's a paper loss at this point, but I'll try to pay particular attention to the full disclosures of their wrongdoings.

If they falsified prior earnings, which led to stronger reported earnings growth rates, estimate revisions by analysts, and so on, that info will call into question my model's assessment of the company's relative valuation. If what they did was only to line their pockets, and didn't hurt the company's profits (though certainly AIZ's reputation), then I'll probably feel compelled to ride out the decline. Of course, if the model ranking falls from the quantifiable aspects of this debacle, then I'll stay strict to the model and sell. I'll occasionally over-ride the model on the buy side, but not on the sell.

AIZ 1-yr chart


Disclosure: Author is long LYO and AIZ

Source: Lyondell Chemical Soars, Assurant Inc. Plunges