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A new lesson learned, don't automatically sell a stock when the original thesis doesn't play out



February 09, 2013 – Comments (0) | RELATED TICKERS: ROC.DL

I have extolled the virtues of Rockwood Holdings several times in here over the past several months. My original pitch for the stock t least in CAPS was back in October. It went something like this:

This is one of Alex Roeper's ideas from the Value Investing Congres. Lithium, a key battery component, is one of this cheap specialty chemical company's products. It will benefit as manufacturers introduce more hybrid vehicles.

Furthermore, he claims that the stock trades largely based on fluctuations in the Titanium Dioxide market, despite the fact that it only accounts for 15% of Rockwood's business. Rockwood actually plans to spin-off the TiO2. This move will help to lower its debt and decouple it from the swings in the price of this commodity.

While I didn't mention it specifically in this quick pitch, one of he things that I really liked about Rockwood at the time that I bought it was the fact that the company was in the process of making a significant acquisition, Talison Lithium. I viewed this move as a positive because I see lithium as a growth market with increased usage in batteries going forward. Fast forward to November and another company swooped in and outbid Rockwood for Talison. At the time, I was disappointed that the deal wasn't going through. So much so in fact that I actually considered selling my position in ROC. Fortunately I held on.

This situation has actually taught me a very important lesson on investing...a significant change in the original thesis that caused you to buy a stock is not a reason to automatically sell the stock. One must reevaluate the investment, particularly for the intended or unintended consequences of the thing that caused the story to change.

In this particular case, yes it was disappointing that the buyout didn't go through, but the result may have turned out to be even better for the investment than if it had. after the deal collapsed, Rockwood made its Investor's Day presentation and the market absolutely loved it. I think that ROC was up over 5% The day after. Rockwood decided to take the money that it had earmarked for the acquisition and use it to make a major share repurchase. Here's what the Credit Suisse analyst, John McNulty, had to say about the company after the recent presentation:

"Catalysts—We believe there are two major catalysts likely for investors in 2013: 1) we expect ROC’s $400 mil share repurchase program (~9-10% of market cap) to be an accelerated program that may be completed by as early as March, and 2) mgmt. indicated that they are committed to separating ROC from the TiO2 business in 2013—while we don’t expect much value for this business, given its drag on the core ROC multiple, regardless of the method (sale or spin-off) this “separation” should drive the stock higher."

Did you see the magic word..."Catalysts". As an investor, that word music to my ears (or eyes I suppose that I should say since no one is reading this stuff out loud to me). It looks like the company's management is on tract to spin-off the crummy Titanium Dioxide business some time this year. I say good riddance, I've seen people trying to make money in that chemical sub-sector for years now in companies like Tronox without much success. The sooner TO2 is gone from OC, the sooner it will likely see multiple expansion.

Fast-forward to last week and Rockwood did it again. Mr. Market sent ROC up nearly 8% on Friday after the company announced that it is exploring the sale of another fairly commoditized business, its ceramic materials unit, CeramTec. This one isn't nearly as bad as the Titanium Dioxide business which apparently is not fetching nearly as much interest from potential buyers as Rockwood had hoped, but selling it was still viewed as a major plus for he company.

One reason is that ROC seems to be undervalued. Even though it doesn't want it any more, CeramTec is expected to fetch a higher multiple than what Rockwood's publicly traded stock fetches right now. Analysts believe that the unit might garner as much as ten times EBITDA.

In the three months since the Talison merger fell apart and I considered selling ROC, its stock has risen around 35%. That's a serious return in a short period of time. The lesson that I am taking away from this is that it is extremely important to thoroughly evaluate a stock on its specific merits and future potential before selling it and not just bail because your original thess didn't pan out. 

Thanks for reading everyone. I hope that you're having great weekends. 


Rockwood Said to Explore Sale of Ceramic-Materials Unit  

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