DB Bob's Feb16 Sales

Continuing my 2016 reflections, I want to share my earliest 2016 sales. It probably won’t be until late February that I write more on this topic. I’m open to feedback on this topic, and willing to talk more about the companies involved, if there’s interest.

For context, I had started reading Saul’s board (from the beginning, but only the posts recommended by at least a handful of people) late in 2015, and I was inclined to reduce the number of stocks I own and follow. For further context, I retired late in 2013, so I’ve been able to devote a larger portion of my time to following the markets and my companies. That said, as I’ve disclosed previously, I am still in catch-up mode getting up to date with all the Foolish boards for my holdings, although I am about 70-75% of the way done, compared to where I was when I retired. So I should be “caught up” by the end of this year. Alphabetically…

BKE - At the time I bought it (I had just retired), The Buckle was recommended by a couple of Fool services and it paid a pretty reasonable dividend. By February 2016, the TMF newsletters were either souring on BKE or had sold it. BKE is best known for denim (jeans), and my purchase was at a time when “leggings” were supplanting jeans in popularity. I thought I was paying a good price for BKE, but I underestimated how badly denim sales would be hurt by this new trend. In a prior post, I indicated that I haven’t done well investing in “fashion”, specifically mentioning GES and COH. Selling BKE (from an IRA) was my first step in reducing my exposure to fashion, and I sold at a loss. In hindsight: BKE is lower now, so I’m glad I got out. COH (also in an IRA) seems to be working on a turnaround and I hope for somewhat higher prices before I sell, but it’s on a short leash. GES, as mentioned previously, is in a taxable account, and I want to wait to sell until I can offset a capital gain.

IIVI - II-VI is a diversified business that works with specialty metals (those in columns II and VI of the periodic table of the elements, hence the weird name). Back then, a core part of the business was optics for lasers. This is a company I discovered (through Value Line) - and bought on my own - just prior to becoming a TMF subscriber in early 2006. Later, it was recommended by two different TMF newsletters, although only one recommendation is still in place. The first of those two recommendations was just a few months after my purchase (and I got a better price), so I was as pleased as punch, as you’d imagine. If I do say so myself, my timing of the IIVI purchase was astute, and I did nicely over time. This is also a company I studied very carefully. As time wore on, I was becoming uncomfortable with the CEO transition (the founder’s long-time right-hand man) and with some of the acquisitions he was making and the debt being taken on to fund those acquisitions. My IPGP holding (described in a previous post - they’re also involved in lasers) was doing better for me, and I decided that I didn’t want to hold both. So I exited IIVI (which had been in an IRA with a very nice gain - both in real terms and compared to the S&P 500) after holding it for slightly more than a decade. In hindsight: I could see that IIVI was planning another management succession, and I liked the heir-apparent better than the current guy. I anticipated that the succession would play out over several years, but it happened much sooner and IIVI appreciated a lot in 2016. I’m a little sad about missing the extra gains, but I can’t complain too much about either the outcome or the process.

PCP - There’s little to say about the sale, since it wasn’t by choice - Warren Buffett’s Berkshire Hathaway acquired Precision CastParts for cash. My purchase price was decent looking at PCP’s history, but it declined a bit after I bought it. Warren bailed me out, so this holding (in an IRA) made money for me and beat the market. In hindsight: nothing more to say…

UPS - I bought UPS in early 2014 in an IRA, thinking I wanted more dividend paying companies in retirement. By 2016, I was increasingly concerned about Amazon’s potential to enter and disrupt the delivery market, so I sold. In hindsight: The sale was too early. I think the threat still exists, but it has been slow to materialize. UPS had a good 2016. I registered a small gain, but didn’t beat the market with this holding. Because I still think the threat is real, I’m content with both process and outcome, even if it went against me.

WPRT - I bought this in mid-2012 in an IRA, flush from some successes listening to the person who was a driving force behind this TMF recommendation. I was definitely not able to keep up-to-date with the company’s message board, and I didn’t realize that Saul had advocated against WPRT until I got to this board. By 2016, most of my WPRT investment had evaporated. As is usually the case, though, my initial investment was not large and the loss was frustrating, but not life-changing. In hindsight: I think my biggest process flaw was not keeping up-to-date with the message boards, where I probably would have begun to doubt the thesis for ownership earlier. As mentioned previously, I’m still behind in my reading, but making great progress and expect to be caught up before too long. WPRT jumped up a bit after I sold, but has drifted much lower over the course of 2016, so I’m not upset about selling when I did. Of course, earlier would have been preferable. But I think I did the right thing when I was finally made aware of the true nature of that holding. Thanks, Saul!

There were eight other sales later in 2016, but only six were voluntary. I’ll get to them at some future date, if there seems to be interest. I hope some of you found at least some of this to be useful.

Thanks and best wishes,
TMFDatabaseBob (long: AMZN, COH, GES, IPGP)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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Bob,

I noticed you’re still holding EXEL. Been a very good last few days with the positive news about their arbitration vs. Genentech settling in their favor:

http://www.fool.com/investing/2017/01/09/why-exelixis-inc-zo…

What’s your take on EXEL at this point? Was 20+% a reasopnable pop given the terms of the deal:

Exelixis is off the hook for $18.7 million in disputed costs, and Genentech will pay Exelixis back $7.1 million for expenses Exelixis previously paid plus interest. Genentech also won’t bill for those expenses in the future, saving Exelixis some money in future quarters and eventually putting more money in Exelixis’ pocket when/if the profit-sharing agreement turns a profit.

What does your crystal ball say about EXEL’s future from here? Any insight would be appreciated.

Cheers,

Eric
long EXEL

Hi Eric!

What does your crystal ball say about EXEL’s future from here? Any insight would be appreciated.

I think you realize that I used to be knowledgeable about EXEL at one point in time, but I have to admit that I stopped reading the quarterly earnings transcripts a while back and let my knowledge lapse. So please take my read on the situation with a grain of salt.

It is unfortunate that Genentech/Roche is proving to be a difficult partner. The fact that Genentech is unilaterally settling this portion of the issues that Exelixis has brought to arbitration is very encouraging. I think the market’s positive reaction stems from the fact that lower costs implies profitability sooner. Since the deal with this drug is profit-share based on U.S. sales (royalties elsewhere), it’ll be a good day when revenues exceed costs.

Was 20+% a reasopnable pop given the terms of the deal”?

I don’t think that the partial settlement with Genentech is the only thing moving Exelixis’ stock price at this juncture. With Takeda taking out Ariad and all sorts of speculation out there about who Gilead might buy and when, I think we’re seeing a bit of acquisition premium in Exelixis’ stock as well.

As I mentioned in a previous post, I plan to lighten up on my holding if EXEL exceeds 5% of my portfolio. It’s not quite there yet, but it is getting closer. We’ll see… Things like “acquisition premium” can be pretty ephemeral…

Thanks and best wishes,
TMFDatabaseBob (long: EXEL; GILD has been on my watch list for a while)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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WPRT - I bought this in mid-2012 in an IRA, flush from some successes listening to the person who was a driving force behind this TMF recommendation. I was definitely not able to keep up-to-date with the company’s message board, and I didn’t realize that Saul had advocated against WPRT until I got to this board…I’m not upset about selling when I did. Of course, earlier would have been preferable. But I think I did the right thing when I was finally made aware of the true nature of that holding. Thanks, Saul!

Hi Bob, You’re very welcome. Yes it really was a bizarre situation. It was really almost mathematically impossible for them to ever break even, but the Fool kept pushing the company in all their ads. By almost impossible, I’m not exaggerating: As I remember, in the quarter I was looking at, they had $30 million in Revenue and $36 million in Net Loss. That meant their expenses were $66 million, more than double their revenue. But Gross Margins were only 27%. If you gave them 33% gross margins on higher volume, and figured that they had twice as much Revenue, doubled it (up 100%), they’d only cut that $36 million loss by $10 million (33% of the additional $30 million in sales).

It was really impossible. And the company was predicting all of 15% increased Revenue, not 100%. And people on the board were furious at me for “attacking” their darling. It was about $30.00 at the time, and it’s now at $1.25. That’s life.

Saul

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