This morning, Top 20 Model Portfolio member SYNO announced that it will be acquired by Baxter (BAX) at $28, with closing expected in Q1. Long-time subscribers will recall that we first added this name in July 2009, so this has been a terrific opportunity that played out over a longer-time frame. We will most likely be selling the stock tomorrow, and I think that 27.77 (where it currently trades minutes after the open) is a fine place to sell.
I want to take a moment to highlight several aspects of the 29-month investment in this company, as I believe there are many lessons we can learn. It also demonstrates how Top 20 is supposed to work, though it wasn't perfect in any sense. I deeply regret now, with perfect hindsight, trimming the name just last week. Before proceeding, here is a chart of the price from the time we bought through yesterday:
My first observation is that sometimes things take time to develop and to play out. I was a bit early initially on SYNO, as we paid 15.34 on 7/14/09 after it dropped from 20 when it announced an acquisition. We continued to add over the next 5 months, paying as low as 11.92 in November 2009. At the end of 2009, our average cost was 14.02. At the time of initial purchase, I set a one-year target of 24. Until today, the initial position lagged the overall market, though the other purchases all proved to be "better than the market" through yesterday (and certainly after today).
My second observation is that trading can add a lot of value. We had three sales, ranging from 12/22/10 until the more recent one last week. The first trade obviously generated a LT gain, and the other two generated a mix of LT and ST gains. We were able to make purchases below our sales prices following the first two sales as well. While my most recent optimization proved costly, I remain committed to allocating more capital to stocks that look more attractive. In 2011, trading has added to our return, even including having a smaller SYNO stake than at year-end.
SYNO was a Small-Cap, maybe even a Micro-Cap. There were very few analysts covering the name when we first bought it, and liquidity has never been great. I had the opportunity to visit with the CEO and CFO in their office in June 2010, was one of the few questioners on their quarterly conference calls and had a continual dialogue with management. In fact, the CFO called me this morning to make sure I was aware of the transaction. While I paid attention to the charts obviously, this was a fundamental story that I embraced and followed closely. From the onset (after a dilutive acquisition), I believed that the market was making a big mistake in how it valued the company. This is the type of situation where good work can pay off, even if it takes longer than expected.
As difficult as this year has been for me with the Top 20 Model Portfolio, I am encouraged by how SYNO played out. This is what Top 20 is all about - finding relatively unknown stocks that have great upside relative to the risk assumed, making the investment and trading it around. We had suffered a drought of acquisitions this year after getting our fair share in 2009-2010. As I shared earlier this year, I didn't expect smaller companies to outperform larger ones but I felt like a large allocation was important given the likelihood of accelerated M&A in a slow economy. Sadly, only SYNO has proven me right, but we have others that I believe could be acquisition targets as well. Predicting the timing, though, is next to impossible.
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