Update on QLTI – a Graham Value Play

Back in April, I wrote about my investment in QLTI, which was the first stock I ever found that met all of Benjamin Graham’s criteria. I bought 1200 shares at $2.13 in an IRA account despite a runup of nearly 30% between the day I found the stock and the day I bought it, thanks to not having had sufficient time to research it enough before getting comfortable enough to invest in it.

At the risk of jinxing myself, QLTI closed today at $4.01, or 88% higher than my purchase price, excluding transactions costs. Truth be told, I had largely ignored it until this week when I noticed its performance.

At $2.13, QLTI was trading at 53% of its net current asset value (NCAV) (based on financials released in July 2009), which is defined as current assets less total liabilities.

Under typical market conditions, you almost never find stocks trading at a discount to NCAV, and Graham recommended buying a diversified portfolio of stocks trading at 67% of NCAV as one of the best strategies to achieve superior returns. At $4.01, QLTI is almost at 100% of its NCAV.

I also found a post at The Graham Investor referring to a strategy for selling. The method is attributed to a person named Van Tharp, who wrote a book called Safe Strategies for Financial Freedom. Tharp recommends the following after buying stocks at 2/3 of NCAV (quoted from The Graham Investor):

Sell a third of your holding when a 50% profit is achieved. If the price continues upwards to 100% profit, you sell a number of shares to make up half your original holding.

You now have your original investment back and have a holding of “free” shares. This strategy can be performed in an IRA using a large portfolio of perhaps 30 similarly undervalued stocks. If the market has been declining for several months, there will be several such stocks to choose from. In an up trending market, however, it will be much harder to find good value candidates but diligent investors who do their homework will more often than not be well rewarded for their efforts.

I’m inclined to try his method even though I missed the first step of selling after a 50% run-up given that I’ve never really figured out a good strategy to determine when to sell a stock. Of course, his method also assumes that your investment will reach a 50% or even 100% return at some point, and there’s certainly no guarantee that investments will work out that well, even if you can find a sufficient number of stocks trading at a sufficient discount to their NCAV.

More updates on this investment as they happen.

Note: As mentioned in my first post, if you choose to purchase QLTI and are a US shareholder, you should consider investing in a tax-advantaged account since QLTI is considered a Passive Foreign Investment Company (PFIC) and can bring significant and complex tax consequences if purchased in a regular investment account.

FD: I own shares of QLTI at the time of writing of this post.

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