How our model scored big with the Ariba takeover

Author: Barry Randall, Crabtree Asset Management

Covestor model: Crabtree Technology

Last month we discussed our disappointment with Crabtree holding TriQuint (TQNT) and our subsequent sale of our position. This month, however, we get to discuss something much more pleasant: the $45 per share offer for Crabtree holding Ariba (ARBA), made by German software powerhouse SAP (SAP).

The all-cash offer occurred mid-day on May 22, and resulted in an instantaneous 25% jump ($36 to $45) in Ariba’s share price. It also occasioned the need for a replacement holding: that search continues.

Ariba’s presence in the Crabtree Fund (a.k.a. the Crabtree Technology model on Covestor) is itself noteworthy: it’s one of the “exceptions” that we reserve for companies that we believe are worthy of investment, but which our quantitative model generally ignores because of a premium valuation.

We’re not going to engage in 20:20 hindsight; Ariba is simply a good company and another company thinks so, too, hence the deal. The takeout offer doesn’t “mean” anything else. It’s just a stock that went up, albeit very quickly.

For the record, Ariba is the 10th Crabtree Fund holding that has been bought in an M&A transaction since the Fund was started in April, 2009. It is, however, only the first since Crabtree joined the Covestor platform in September, 2011. Takeouts are great, but we never factor that possibility into the decision of whether or not to own a stock.

Another noteworthy event in May was the completion of the GIPS Verification process for Crabtree Asset Management. GIPS (“Global Investment Performance Standards”) is the industry standard for presenting the performance of a particular company, as well as for any investment strategies and vehicles (i.e., funds). In our case, the verification process was for the first three years of the Crabtree Fund’s existence: April 2009 – March 2012.

We’re very proud to have completed the GIPS-verification process. We hope it will serve to assure current and potential investors that the historical performance that is listed on our own web site, as well as on our Covestor model page, is an accurate representation of the real-world performance of our investment strategy. We hope to have the performance presentation document on our web site very shortly, but you can request it by e-mailing us at

And speaking of performance, the Crabtree Technology model had a somewhat mixed performance during the month of May. Most major market indices declined during the month, and the model performance was influenced by the same market weakness.

During the month, the Crabtree Technology model declined 7.2%, which, while disappointing in absolute returns, was slightly better than the -7.3% decline recorded by the Nasdaq 100 Index and slightly worse than the -6.3% decline of the S&P 500. The model performance, however, was materially better than that of our internal benchmark, the Merrill Lynch Technology 100 Index, which declined -11.9% in May.

Lastly, May brought our quarterly re-balance. Following our standard procedure, we ran our quantitative model on May 16, and combined the results with our own qualitative research. By May 20, we had developed a list of buys and sells that we subsequently executed.

Sold out of the Crabtree Fund were, Acuity Brands (AYI), Coherent (COHR), DSP Group (DSPG), FEI Company (FEIC), Hi-Tech Pharmacal (HITK), MKS Instruments (MKSI), MTS Systems (MTSC), Newport (NEWP), Insight (NSIT), OI (OIBR) (both common and preferred), Perficient (PRFT), Rudolph Technologies (RTEC)and Vocus (VOCS).

Replacing them were LSI Systems (LSI), Calix (CALX), Perfect World (PWRD), Progress Software (PRGS), Accelrys (ACCL), ICU Medical (ICUI), TNS (TNS), EPAM Systems (EPAM), BT Group (BT), Gencorp (GY), Cambrex (CBM), Photomedex (PHMD), Kongzhong (KONG) and Mentor Graphics (MENT).

Additionally, we trimmed three holdings, Medidata Solutions (MDSO), SXC Health (SXC) and Liquidity Services (LQDT), which, while they still “made the cut” in our quantitative model, had appreciated and therefore needed to be trimmed back to 2% positions.

In summary, May was busy and brought with it good news (Ariba), the completion of an important firm goal (GIPS verification) and the normal mid-quarter re-balance. June will bring the beginning of summer, supposedly a quiet time. But when you’re running a technology fund, quiet can still get pretty loud.