Last Monday, after an extended proxy fight, PartnerRe (PRE) announced that they would be bought by Exor for $140.50 per share.  This sweetened offer to a previous Exor bid represents a 24% gain to the January 1^st share price.  The Pawleys Dividend and Pawleys Growth Fund use similar stock selection criteria: we seek to identify companies with low debt:equity ratios, strong earnings per share growth, and solid cash-flow.  The Pawleys Dividend Fund typically holds 10-12 long positions, while the Pawleys Growth Fund holds 20-25 long positions.  Why is this concentration of the portfolios important and how does it relate to PRE?

In each year from 2011-2014, the Pawleys Growth Fund has outpaced the S&P by an average annualized gross total return of 6.5%.  During that time, we have had four holdings bought out for significant premiums – Par Pharmaceutical and Mediware Information Systems during 2012, and Questcor Pharmaceutical and Sapient during 2014 (total returns to the portfolio for each holding of 54%, 73%, 120%, and 44% respectively).  If the PartnerRe/Exor deal closes, it will mark the 5^th buy-out of a Pawleys Growth holding in 5 years.  Given that we typically hold 20-25 positions at any time, in my opinion this is a remarkable accomplishment, and speaks to the power of our stock selection process.  It gives me confidence that the criteria we use help identify companies that other entities find valuable.

There is much attention on the Pawleys Dividend Fund this year, as it is outpacing the Dow Jones Industrial Average by over 10% year-to-date (total return).  But don’t overlook the Pawleys Growth model – despite a lag to our benchmark this year, the long-term performance trend is strong.  We never count our chickens before they are hatched – but I believe five buy-outs in five years is a fantastic result.

© 2015 Pawleys Capital Management, LLC. All rights reserved.

Rising contagion in Greece and Puerto Rico drove U.S. equity markets lower as we closed out the second quarter and entered July.  Here along the beautiful coast of South Carolina, most investors focused on these negative events within the global credit markets, and missed the positive local news.  On July 1, Moody’s Investors Service upgraded the City of Charleston Water and Sewer System revenue bonds to Aaa.  The system is now one of just 10 wastewater utility systems in the country to hold Moody’s highest possible rating.  This news went mostly unnoticed, masked by the cacophony of Greece and Puerto Rico.  Although news sources reported on these situations with typical fervor, neither should come as a surprise, as both entities have both been running out of money for years.

The equity markets seemed to remember this quickly and shrug off concern.  Within a week, the Dow marched back above 18,000.  Simultaneously, the S&P 500 volatility index (VIX), dropped throughout the month of June.  As of yesterday’s close, the VIX stood at 11.95.  Over the past ten years, there have only been three notable periods when the VIX stood lower; spring 2006, late 2006, and last summer.

The VIX merely measures expected volatility in either direction.  But this low level, combined with the market’s resilience to this summer’s geopolitical speedbump, is very possibly an indication that we have entered what will become a strong second half of 2015 for the equity markets.

Source: Yahoo! Finance © 2015 Pawleys Capital Management, LLC. All rights reserved.