SIN Picks

The Timeless Question: To sell or not to sell

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July 9, 2009 | SIN Picks | Author Asif

I received a question from a subscriber earlier this week that resonated with another question I received from a subscriber shortly after I sold one-half of our position in Indian mining company Sterlite Industries (SLT) for a gain of 95.12% a couple of months ago. Both these questions were related to the trading axiom “Let your winners run but cut your losses quickly”. In the eyes of both these subscribers I had violated this axiom.

The subscriber who wrote to me about Sterlite Industries and Tata Motors (TTM), wanted to know if I felt any seller’s remorse after selling 100% of my position in Tata Motors and 50% of my position in Sterlite right before a rally in Indian stocks that saw Sterlite’s stock move up to $11.57 just days after I sold it for $9.19. He was quite clearly referring to the “Let your winners run..” part of the trading rule of thumb I mentioned above.

While I did feel some amount of seller’s remorse at selling half my position in Sterlite, years of experience have taught me that I am usually much better off taking profits (or losses) periodically based on a combination of company fundamentals, sector fundamentals and sentiment (fear like we had few months ago when I purchased Sterlite and euphoria at the time I sold it). I finally sold the second half of my position in Sterlite last week for a gain of 167% as mentioned in the July 2009 investment newsletter.

I pointed the subscriber to a comment that someone left at the bottom of this article that Seeking Alpha republished from the SINLetter blog entry Taking Profits in Umpqua Holdings. Oregon based regional bank Umpqua Holdings (UMPQ) was trading at $16.47 when I sold it for a gain of 35.78% and had appreciated by, get this, 56 cents to $17.03 when the commenter made the statement “Missed out on that one, huh? Oh ye of little faith! Expect money to continue into this stable, divi-paying player”. The stock went on to hit a high of $19 before crashing to its current price of $7.62. Given that the company cut its dividend to 5 cents per quarter and the stock is now available for less than half our selling price, I am not exactly certain who missed out.

Something similar occurred back in mid-2006 when I sold weight loss company Medifast (MED) for gains of over 230%. Had I held off on selling Medifast, I would have seen those gains cut in half at Medifast’s current price of $10.04. At one point last November, Medifast dipped down to $3.52. Even investors who are just starting out realize that “buy low and sell high” is a myth as it is neither possible to consistently get in at the absolute bottom or sell at the exact top. If you get a chance to sell at a decent profit based on sound fundamental and/or sentiment related reasons, taking some money off the table is not a bad idea.

If I have a weakness, it is not selling my losing positions soon enough. This was the subject of the question I received from another subscriber earlier this week who wanted to know why I do not use some sort of loss limiting strategy to eliminate stocks that have dropped 25 to 30% and preserve the capital to invest in other stocks that could turn out to be winners.

Using stop losses or monitoring a position so that you get out if the position drops by a certain percentage is a very good strategy. I used to be more nimble in the past and at one point sold Brazilian aircraft company Embraer (ERJ) and healthcare service provider Unitedhealth Group (UNH) for small losses when the underlying business fundamentals changed. Both companies eventually went on to lose more than half their value.

Unfortunately during this bear market, which has been characterized by high volatility and 900 point swings in the Dow in a single day, I have not stayed on top of taking losses in positions. I did close out losing positions like ETF provider WisdomTree Investments (WSDT.PK) and Barclays Bank (BCS) but as is often the case Barclays appreciated right after I sold and the loss on Barclays right now would have been much lower had I held on.

It was Warren Buffett who once said something to the effect “If you can’t handle your investment dropping by 50%, you should not be investing”. In a market like this, selling a position just because it has dropped 50% makes little sense. I am constantly evaluating each position in the SINLetter model portfolio and continue to have confidence in most of them. The two that I will most likely sell in the near future are Textron (TXT) and Blockbuster (BBI) as both of them have dropped precipitously and it is unlikely they will recover to the levels we bought them at.

Overall my outlook remains bearish at this point as mentioned in the July investment newsletter. If you have not had a chance to read the latest installment of gloom by Nouriel Roubini (also fondly known as Dr. Doom), you can check it out in the Forbes article titled Brown Manure, Not Green Shoots. It looks like UC Berkeley professor and former Secretary of Labor Robert Reich shares Dr. Doom’s gloomy outlook. I started my first short position since late 2008 in the form of put options in the Special Reports Portfolio on June 18 and added to those puts in my personal portfolio a week later.

I continue to look for both long and short opportunities but at this point sitting still and letting your investments play out like the speculator Jesse Livermore suggested might be the best idea.

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Closing Portfolio Positions

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April 17, 2009 | SIN Picks | Author Asif

April has been a kind month to the SINLetter model portfolio with the portfolio up more than 10% in less than three weeks. The rally that started on March 9 has continued unabated with the Nasdaq posting a gain of over 30% and the S&P 500 up more than 28% over the last six weeks. In the Special Reports update I posted on March 11, I wrote,

“The powerful rally staged by the market yesterday from extremely oversold levels is being construed by some as the first rebound from a bear market low but most investors appear to have a more sanguine view, dismissing the rally as the start of a bear market sucker’s rally. This negative sentiment leads me to believe that the rally may be more than a one day wonder.”

Sentiment appears to have changed since then and many sentiment indicators are implying that investors have become more bullish since early March. The fundamentals don’t support a rally of this magnitude and some of the “earnings” we are seeing from the big banks can be attributed to the change in mark-to-market rules and profitable counter party trades against AIG. I would like to use this rally as an opportunity to close out of several positions in the Special Reports portfolio and the SINLetter model portfolio, some of them at tidy gains and others at steep losses.

I am selling apartment REIT AIMCO (AIV) from the special reports portfolio for a roughly 36% gain, while retaining our other apartment REIT AvalonBay (AVB), which is up more than 43% since the first special report was published on February 23.

I am also selling PICO Holdings (PICO), Intel (INTC), Tata Motors (TTM), Barclays (BCS) and WisdomTree Investments (WSDT.PK). We invested in Barclays because of the potential of its iShares ETF division and with the bank’s decision to sell its crown jewel iShares division at fire sale prices, I don’t see much point in holding on to a company that is at this point no more than a globally diversified bank. The stock has also quadrupled from its January 23 lows of $3.07.

The iShares division had assets under management (AUM) of $331 billion as of the end of 2008. The expected sale price of $4.2 billion, is just 1.27% of AUM. Using this valuation, our other (unfortunately disastrous) ETF play WisdomTree Investments should be worth just a little more than one third its current market cap. As of yesterday, WisdomTree’s ETF AUM  were $3.07 billion.

I hold all the stocks mentioned in this blog entry in my personal portfolios. I will also execute these trades in my personal portfolio with the exception of Intel and Tata Motors where I am going to sell my earlier positions for long-term tax losses but will retain more recently acquired shares at lower prices.

The closing price today will be used as the selling price for these stocks.

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Can Intel (INTC) Drive The Market Lower?

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April 15, 2009 | SIN Picks | Author Asif

A lot of attention was focused on Intel’s first quarter earnings, which were released yesterday and came in better than expected on all three fronts: revenue, margins and net income. The company reported earnings of $647 million or 11 cents per share on $7.1 billion in revenue at 45.6% gross margins. Sure, expectations had been lowered to a great extent in recent weeks but the focus was on Intel’s outlook and what that outlook implied for the rest of the tech sector.

With Intel’s stock up more than 32% since its Feb 23rd low of $12.08 and the Nasdaq up over 28% since March 9th, a strong outlook from Intel, which happens to be both a Dow and Nasdaq 100 component, was integral for the rally to continue. Beyond Intel’s comments that the PC industry had hit bottom in the first quarter, the company did not offer much in way of guidance. The company expects Q2 revenue to remain flat when compared to Q1. With inventories down significantly in the first quarter (down $699 million or 19% from Q4), the company expects gross margins to be much higher in the second half of the year. The company reduced its headcount by 1,400 in Q1 and net margins are likely  to improve through the rest of this year.

The stock dropped more than 5% after hours on that lack of guidance and there is a good chance that Intel could lead the market lower in the coming days or weeks, especially since this rally appears to be getting a little long in the tooth. Irrespective of how the market behaves, Intel’s stock is almost certainly going to head lower on valuation concerns, unless investors decide to focus on the company’s comments about PC demand hitting bottom in the first quarter.

Earnings in the first quarter dropped 55% when compared to Q1 2008. If we assume a similar drop in the second quarter of this year (the company expects gross margins in the mid-40s and flat Q-over-Q revenue) and a more optimistic 30% drop in the second half of this year I get a forward P/E of 23.23 on earnings of $3.834 billion for the year. I used a 24% tax rate for the second half of this year as indicated by Intel in its conference call and excluded special items such as the $1 billion Clearwire related write-off in Q4 2008 to come up with the earnings number for 2009. Considering that the forward P/E for other tech giants such as Oracle (ORCL) and Cisco (CSCO) is much lower at 12.66 and 15.07 respectively, I expect Intel to drop significantly.

Our position in Intel in the SINLetter model portfolio closed at a small gain as of yesterday’s close but will most likely swing into the red. If you have a short-term horizon, getting out of Intel may not be a bad idea. If you have a longer investment horizon, adding to Intel after a pullback in view of the next cycle is also an option, especially since Intel’s dividend yield will go above 4% in the event of a 15% decline in the stock price from these levels.

I will update this blog post and/or send out a tweet (@specialsin) if I decide to sell Intel based on market reaction today.

Voluntary Disclosure: I hold a long position in Intel in my personal portfolio.

Update 4/15/2009 11:15 AM PST: I have decided to hold on to Intel for now.

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End Of Year Portfolio Changes

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December 25, 2008 | SIN Picks | Author Asif

I would like to start the last blog entry of 2008 by wishing all of you happy holidays and to thank you for staying with me through this challenging year. It is hard to believe that another year has almost passed us by and it is time to reflect upon all the achievements, losses and especially the lessons learned along the way. I put together a list of 10 worst investor mistakes last November and given the current state of the market, I think it is very likely that many investors are likely to commit the last and most critical mistake mentioned in that blog entry.

In a year in which we experienced both the biggest bailouts amounting to nearly $3 trillion and the biggest ponzi scheme in absolute dollar terms, it is hard to believe that I actually have taxable gains for the year in my personal portfolios. I started paring back on some positions earlier in the year not only because of my 2008 outlook but also to prepare for a big purchase. Since we (thankfully) held off on this big purchase, I reinvested some of this capital back into existing portfolio holdings in October as discussed in the blog entry What Next?.

To offset my short-term and long-term capital gains, I am going to sell partial positions in Barclays Plc (BCS), Powershares Water ETF (PHO), Tata Motors (TTM) and SourceForge (LNUX). I am also selling my entire position in ModusLink Global Solutions (MLNK), formerly known as CMGI, as well as Marcus (MCS). Just like the SINLetter model portfolio, I had taken triple digit gains in LNUX in the past but still had a small position remaining in my personal portfolio.

While I believe Marcus (MCS) has a great management team and its theatre segment has performed well, the lodging division of the company continues to hurt and I don’t see much improvement in 2009. This is also the only stock I plan to sell from the SINLetter model portfolio and will use the proceeds to add to our position in Activision Blizzard (ATVI).

Given that I purchased additional shares of Barclays Plc (BCS), Powershares Water ETF (PHO) and Tata Motors (TTM) in October, all I am doing at this point is getting rid of my original positions for a tax loss, while avoiding a wash sale, as the additional shares were purchased more than 30 days ago.

Keeping the three day settlement period rule in mind, I believe the last day to sell for tax loss reasons would be Friday, December 26, 2008. Accordingly, I plan on selling Marcus and purchase an additional 600 shares of Activision Blizzard for the model portfolio on Friday. Update 12/26/2008: I received a few questions from subscribers about my statement regarding Friday being the last trading day to sell for tax loss reasons. I called my broker TD Ameritrade this morning and they confirmed that it would be best to sell on Friday so that the orders would settle before the end of the year. Update 12/29/2008: A couple of other sources including Charles Schwab indicated that it is the trade date that matters and not the settlement date. Hence it is possible to sell until December 31st, 2008 for tax loss purposes.

I am leaving with my family for a much needed vacation to Southern California tomorrow and hence the next investment newsletter will be published on January 5th instead of January 1st.

Voluntary Disclosure: I currently own long positions in all the stocks mentioned in this blog entry.

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Tata Motors: Facing the Perfect Storm

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December 17, 2008 | SIN Picks | Author Asif

The shocking terrorist attacks in Mumbai last month that targeted The Taj Mahal Palace hotel amongst various other locations were unlike any other India has experienced in recent years and deeply affected the psyche of a nation. These attacks are going to have a direct impact as well as indirect ramifications for the Tata group of companies. The Taj Mahal hotel belongs to the Indian Hotels Company (BSE: 500850), one of 96 operating companies that constitute the large Tata Sons conglomerate. The hotel not only suffered physical damage caused by the attacks but also from the negative spotlight thrust upon it on an international stage. These inhuman attacks painted a bleak picture of India’s ability to respond to an enemy that is agile and defies the normal rules of engagement. This video footage (some graphic images) of two cops, a shared rifle and a chair against an AK-47 shows just how inadequately prepared India is to respond to both domestic and international threats.

India is likely to see an increase in government spending on defense, intelligence and infrastructure in the months and years to come. The Tata Group of companies that manufacture everything from steel to military vehicles made by Tata Motors (TTM), will most likely benefit from an increase in defense spending, which is currently under 2% of annual GDP. However armored trucks and plans to develop a new platform for Land Rover to win defense orders are probably no more than a drop in Tata Motor’s $9.126 billion annual revenue bucket.

It has been over three years since we first covered Tata Motors (TTM) and a lot has changed both with the world as we know it and with India’s largest automobile company Tata Motors. Back then Tata Motors was a company with a strong balance sheet, double digit domestic and international sales, an exciting small car called the Nano under development and a rapidly growing economy  to service. In contrast the company experienced a 30% decline in overall sales this November when compared to November 2007, a 43% decline in exports, downward revisions of 2008-2009 Indian GDP growth forecasts of 7.5% and a balance sheet that had been riddled with a $1 billion bridge loan to fund the $2.3 billion purchase of Jaguar and Land Rover from Ford Motor (F).

According to the last annual report of Tata Motors, the company spent 64% more on R&D in 2007-2008 when compared to the previous fiscal year. Instead of contributing to revenue and the bottom line, the Nano is putting additional economic strain on Tata Motors. The company had to recently close down its new factory in the eastern state of West Bengal due to protests by farmers and open another in the opposite end of the country in the state of Gujarat (my home state).

With initiatives ranging from a partnership with French car company MDI to create a car that runs on compressed air, a potential partnership with Chrysler to build an electric version of its popular mini-truck called the Ace, integration of its recent acquisitions and the much anticipated launch of the Nano, Tata Motors may be stretching its resources too thin. Both Moody’s and Standard & Poor’s recently downgraded Tata Motor’s debt one notch and have a negative outlook on the company.

While it may look like Tata Motors is facing the perfect storm, the news is not all bad. The Jaguar unit of Ford was not profitable and when Tata Motors decided to acquire Jaguar and Land Rover from Ford, there were concerns about the profitability of the combined unit. Some media reports also suggested that the unit posted a loss of $383 million for the Jan 1, 2008 to June 1, 2008 period. According to this September press release by Tata Motors, Jaguar and Land Rover together delivered earnings before interest and taxes of $688 million in the first six months of 2008. Not only did Tata Motors acquire the two units for a fraction of what Ford paid for them, Ford also funded $600 million in retirement benefits as part of the deal. The redesigned visually stunning Jaguar XF helped push up Jaguar sales by 17% year-over-year in the July to September period.

Another concern amongst investors regarding Tata Motors during the summer and fall had to do with the impact of rising commodity costs on Tata Motors and the propensity of Indian consumers to secure a high interest auto loan. With real estate loans running north of 13% just a few months ago in India, the cost of owning a car once an automobile loan is factored in had increased significantly. A big drop in Tata Motors stock on account of these concerns and a voracious bear market in India that saw the BSE Sensex fall from 21,000 in January 2008 to a low of under 8,500 by November 2008, disrupted Tata Motors plan to convert the $1 billion bridge loan into equity financing through a rights issue. The rights issue was not well received because it was priced almost 28% higher than the price of Tata Motors on the exchanges. The unsubscribed portion of the offering was picked up by Tata Sons and other group companies like Tata Steel.

The Reserve Bank of India dropped its lending rate earlier this month to 6.5%, the third cut since October. With commodity prices off significantly from their summer highs and the cost of borrowing coming down, some of the challenges Tata Motors faced through most of 2008 have self-mitigated.

With operating margins of over 24%, the software services company Tata Consultancy Services (TCS) has been a profit machine for Tata Sons and became the first Indian IT company to reach $4.3 billion in annual revenues in 2007 as discussed in one of my blog posts about TCS.  While Tata Motors is suffering a short-term liquidity crunch, other companies in the group can step up to help Tata Motors in its time of need.

After booking a 64.99% profit in late 2007 on our original 2005 investment, buying back into Tata Motors in March 2008 was a mistake. However selling the position at this point would be bigger mistake as the stock has lost nearly 75% of its value year-to-date and the company is being priced for bankruptcy or a protracted downturn. The current dividend yield is a very juicy 8.1% but could be slashed or suspended to preserve much needed capital. With a viable core business and a promising pipeline of products, I view this setback as a buying opportunity for long-term patient investors and have been periodically buying the stock at these levels for my personal portfolios.

As always, please do your own due diligence and reach your own conclusions.

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