Defying Gravity

Investment Analysis Clubs Saul’s Investing Discussions
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I have a number of companies in my portfolio that I would not buy today, but I’m having a lot of trouble with the idea of selling them. I know some of these are pretty risky just based on the PE as reported by Yahoo (I’m still getting organized - I’ve not gone back and got the numbers from all the quarterly reports yet). A couple others have reasonable PEs, but supposedly have little room to grow due to current size, but somehow, they still do. All of them were purchased due to TMF recommendation. I’ve said it before, although I’ve been re-examining the buy-hold strategy advocated by TMF, and I’ve already sold off some that didn’t perform so well (can you say Westport? How about Amazon? . . .), but, I’ve actually done quite well with TMF recommendations. I still subscribe to some of their services, and I still don’t buy most of the recommendations.

So, why am I writing about it? Well, I guess I’m seeking input from the smart folks who read this board - BTW, if you read this board, I consider you one of the smart folks . . .

It’s pretty easy to say sell that one, I tell myself that almost every day, it’s buying something better that gives me pause. I’m already long most of stock that gets pretty much positive coverage on this board, but maybe I should up my holdings in some. I have my investments divided into four portfolios, I know percentages for each portfolio, but I don’t know overall what percentage is invested - gathering everything under one umbrella is my next project.

Anyway, here’s a list. For most of them the date is when I made my first investment.

First the big ones that keep growing:
AAPL Feb 2013 +82% PE: 17
DIS Apr 2012 +154% PE: 24
PCLN May 2012 +89% PE: 26

Kind of risky:
MNST Nov 2012 +228% PE: 50
AMBA Jan 2014 +139% PE: 48
HAIN Apr 2012 +149% PE: 49
CMG Feb 2014 +24% PE: 48 (OK - I should probably get out of this one)

Then, there’s the crazy ones:
NFLX Feb 2014 +25% PE 132 (I was going to sell, it popped so now ?)
SWIR Sep 2013 +165% no earnings
ZLTQ Aug 2014 +54% PE: 841 (waiting for LT cap gain tax)

And while I’ve got your attention, what do you think of KMX? I bought it Dec 2013, +46% PE: 26. Small percentage of my holdings, but seriously considering putting more $ here.

Any and all comments will be very much appreciated. Thanks

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Of the ones listed I would not sell AAPL or PCLN (I own neither), both have terrific moats and both will keep on growing.

Denny Schlesinger

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Of what you have, I hold AAPL, DIS (I’m not touching either!)

AMBA and CMG. I am holding AMBA, thinking of writing puts but a little scared, and I am also contemplating whether I should sell or hold CMG.

CMG earnings are tomorrow. I think this is a good, nice, business and I don’t think it’s a loser, so I am tempted to sit on it. However – are there better places for the money? I have not settled on that yet. If it is a slower-grower, maybe I would rather be in something with a dividend, hey, maybe even more DIS

I wish I had bought MNST last summer when I was thinking about it!

Karen

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Brittlerock,

Your list includes several companies that have strong moats. So the answer on what if any to sell depends on your investment goals, right? If you are starting to use drawdown your investment funds then you would view high growth, high PE companies differently versus if you were looking to accumulate for the next 5 to 10 years.

So I can answer from my point of view what I would continue holding. My goal is to accumulate over the next 15+ years and get about 15-20% annualized rate. I use options to help me out. I would continue holding Apple, Disney, Hain, Priceline, and even CMG; among these I hold Apple and Priceline, and would like a better entry for the other two. I would also continue to hold Netflix. I have over 800% gain on my position and I am still holding. Lots of room for growth.

AMBA is a semiconductor company with high PE and insider selling. I have sold it already.

SWIR has earnings and they are growing fast but it’s in a fast evolving industry, so caution warranted. I continue to hold. Based on what we know, a below $35 price looks like a decent entry point. See my SWIR notes on the board for details. If you can’t find them, send me email and I will send them to you.

The other tickers I have no idea about.

Anirban.

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First the big ones that keep growing:
AAPL Feb 2013 +82% PE: 17
DIS Apr 2012 +154% PE: 24
PCLN May 2012 +89% PE: 26

I hold both Disney and Apple. I like both companies and plan to keep holding them. Disney seems to be firing on all cylinders with hit movie after hit movie with many more in the pipeline. Their parks, ESPN, ABC and their merchandize categories are all doing well.

Apple: I think the Apple Watch is going to surprise people with how well it will do. The IPhone keeps doing well. Plus,I think more is in their pipeline that will be coming out.

Kind of risky:
MNST Nov 2012 +228% PE: 50
AMBA Jan 2014 +139% PE: 48
HAIN Apr 2012 +149% PE: 49
CMG Feb 2014 +24% PE: 48 (OK - I should probably get out of this one)

I own AMBA, HAIN and CMG.

Ambarella is doing great.However, I’m trying to watch this one extra close as its a tech company.

Hain I like long term. Society seems to be eating healthier and healthier. They have made a lot of acquisitions with probably more on the way.

CMG, I also like. Earnings come out soon so we shall see how they did this last quarter. They plan to open around 200 restaurants this year. Plus, they have Shop house and their pizza restaurants that they are trying to get going.

Then, there’s the crazy ones:
NFLX Feb 2014 +25% PE 132 (I was going to sell, it popped so now ?)
SWIR Sep 2013 +165% no earnings
ZLTQ Aug 2014 +54% PE: 841 (waiting for LT cap gain tax)

I bought Netflix at $27 and sold it last spring around $430. The proceeds paid to renovate my basement and to add a bathroom down there. My house really needed this work done. However, if I was still holding, I would keep on holding. Total subscriptions are around 60 million with 40 million being in the US.

They say they will be in 200 countries by the end of 2016. Even when they enter a country, they have room to add subscribers for quite some time.

Plus, first it was DVDs, now streaming and original content. What else may be coming?

I also hold SWIR. I’m up a lot. However, I’m trying to really watch them. Their is a ton of room for growth with the IOT, but at the same time, they could drop as fast as they went up.

It may appear that some on this board may not own many of the stocks you listed. My XIRR over 10 years is 20%. I’m hoping to improve that by learning from Saul and others and tweaking how I’ve been doing things.

I was distracted during the writing of my post. So, I’m curious to see if their are more replies.

Fool on,

mazske

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Here’s a test suggested by Hewitt Heiserman Jr. for established companies with consistent quality earnings and that are more or less self-funding. Apple and Disney fit that description.

  1. Decide the total return you want over X years. (We’ll use 10 years here for illustration only).

Let’s say you want an annualized, total return of 20% over the next 10 years. For Apple, the return you need for appreciation will be 20% minus the dividend of 1.5% = 18.5%. For Disney it will be 20% - 1.1% = 18.9%.

  1. Calculate EV (Enterprise Value).

APPL is 743B market cap + 37B debt - 177B cash & investments = 603B. DIS is 184 market cap + 16B debt - 8B cash & investments = 192B.

  1. Calculate market value 10 years out based on your required return (from Step 1).

APPL 603B annualized 10 years at 18.5% = 3,292B. DIS 192B annualized 10 years at 18.9% = 1,084B.

  1. Estimate P/E 10 years out. (Yeah, it’s a guess).

Say we think Apple’s P/E will be 10 in 10 years. For Disney we estimate it will be 15.

  1. Calculate what earnings would have to be 10 years out.

For APPL it would be 3,292B/10 = 329B. For DIS 1,084B/15 = 72B.

  1. Calculate the needed earnings growth.

APPL today is 44B so need 22% growth per year to reach 329B in 10 years. DIS today is 7.8B so need 25% growth per year to reach 72B in 10 years.

  1. Figure out how realistic the growth rates look. If they don’t look realistic, then you have to go back and change your assumptions.

This is easy to set up in Excel and you can play around with the numbers to do what if. I find it helpful to just give me another sanity test.

Hope this helps.

Ears

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I am in same boat as you. I own, or have owned, all of your companies except ZLTQ. Unfortunately I have sold, a few years ago, HAIN, MNST, and most of SWIR. On those I listened to the noise of the blogs and sold “bad company” or “sky is falling” on Seeking Alpha or even MF.
I say I am in the same boat, and what I mean by that is that I am asking myself “why do I own this” as I go down my too long list of companies.
For now, I am keeping all on your list. I have a special post that I have been trying to write on Ambarella, particularly about the customer concentration and slowing of payments. But the main message I would offer is that your problem is one of investor psychology. And so I advise you to google “epsilon theory nail” which won’t give you any answers to your question but will tell you why you are asking the question and that you are not alone.

KC

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Brittlerock,

I can comment on some of these stocks as own them, have owned them, or have looked at possibly buying them.

AAPL: I bought AAPL in 2008/2009 and sold it last year. I think the valuation is good. I sold because I want companies that can have the potential to go up significantly. AAPL is too big for that.

CMG: I still own this company (only 3.4% of my portfolio) but I have contemplated selling. I would not buy at these levels. I calculate an adjusted TTM P/E of 42.5 after adding back stock based compensation assuming CMG’s tax rate of 35%. Earnings are out tomorrow so I expect the P/E might drop to 40. I own the shares in a taxable account and 92% of the value of my position is profit (the rest would be taxable when I sell); this has influenced me somewhat. Other positives: the company can still get much bigger as I believe that they can still double burrito restaurants in the US because the US gets saturated; international expansion has started. ShopHouse and Pizza offer more growth opportunity. Management is superb and I believe that companies with a history of stellar execution, honesty, and shareholder friendliness deserve a higher P/E. I eat at Chipotle about every 10 days on average and I am always amazed how long and fast moving the lines are. But the stock is expensive and when their growth eventually slows their P/E must come down. Like you, I am torn between holding and selling this one. I also own BWLD which also has superb management and room to grow. It’s P/E is a bit more reasonable at 32.3 but still higher than most of my companies.

AMBA: I own this one and while the P/E is high at 37.5, I don’t think it’s overly expensive given its super fast growth in adj EPS, its growing markets, and its recent win with Xiaomi. It’s 4% of my portfolio and I’m keeping this one.

SWIR: I looked at this one late last Summer and I decided to buy SWKS. Both companies will benefit from IOT but SWIR isn’t growing nearly as fast and their earnings didn’t impress me.

ZLTQ: I looked at this one for a friend who had bought it. I passed on this. Here’s what I wrote him on Feb 27, 2015:
ZLTQ just became profitable a few quarters ago. It’s growing at a reasonable pace. Sales are expected to increase about 30% in 2015 over 2014. In my opinion, the stock is not cheap but there are more expensive stocks. The training 12 months P/E (P/E is price divided by earnings) of 85 is not meaningful since it contains Q1 which had -$0.14 in adjusted earnings per share. But if you assume they will earn 23 cents in Q4 2014 and 30 cents in Q1 2015 then you still get a P/E of about 40.5 (that’s $34 price divided by 84 cents). If I compare that to SKX or SWKS which are growing earnings 50-80% and are trading at P/Es below 25, it’s clear that I would rather put my money those other stocks.

Looking forward, I might guess that ZLTQ might earning $1.90 in adjusted earnings in 2016 (just my guess). The market might pay a P/E multiple of 25-30 for this company. This would give you stock price between $47.50 and $57 two years from now. That would be a little less that 20% per year on the low end and around 30% per year on the high end. That would be a good return. BTW, in general the higher the earnings growth rate the higher a P/E multiple investors are willing to pay for a stock.

ZLTQ is reporting their results for Q4 2014 next week. They already gave preliminary results in early January and they have forward guidance on 2015 revenue ( 31% growth over 2014).

I would say it’s an ok investment but I wouldn’t put in a lot of money in this one because the P/E is a bit high compared to other companies that I can invest in.

Besides the companies that you listed, I sold UA: due to high valuation.

Hope this helps.

Chris

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Hi Chris,

Just commenting on the bit about SWIR:
SWIR: I looked at this one late last Summer and I decided to buy SWKS. Both companies will benefit from IOT but SWIR isn’t growing nearly as fast and their earnings didn’t impress me.

SWIR has shown rapid growth in the past few quarters, although off a small base. They have got quite a bit of operational leverage in recent quarters (with adjusted eps growing faster than revenue growth). Below are the numbers I have on my spreadsheet:


----------------------------------
Quarter Rev ($M)    EPS     QoQ EPS
----------------------------------
Q4 14	$149.00	  $0.29	   190.00%
Q3 14	$143.30	  $0.24	   118.18%
Q2 14	$135.00	  $0.08	   166.67%
Q1 14	$121.10	  $0.02	    N/A
Q4 13	$118.70	  $0.10	
Q313	$112.30	  $0.11	
Q2 13	$109.60	  $0.03	
Q1 13	$101.40	 -$0.02	
----------------------------------

Note, Q1 15 guidance is for $147M revenue and EPS of $0.17. That puts them on a forward PE of about 47 … a bit expensive but there’s some solid earnings growth to be shown for that and usually they have a back loaded year with Q3 + Q4 being bigger than Q1 + Q2. I consider buying at 40x forward earnings a reasonable price for this fast growing small cap, so somewhere in the $32 range is okay.

Anirban

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Hi Brittlerock,

I’m fairly new to the board --have only been following it for less than a month – and still struggling with some of the ideas advocated here. One of the things that I have been thinking about is exactly the problem you put up here, so I’ll share my thoughts, both as an attempt to contribute and to get some feedback from you and other smart folks here whose posts I learned a lot from and enjoyed tremendously.

The problem you presented is basically what to do with stock that one bought but wouldn’t buy today, to sell or to hold? If selling, the problem is, as you said, “it’s buying something better that gives me pause”; if holding, is one letting one’s unwillingness to admit a mistake get the best of oneself (as Saul likes to say), and missing out on better opportunities out there?

I tend to think that it all comes down to judgment (whatever it’s made up of); more specifically, it’s the difference between how good your judgment is today and how good it was when you made the purchase. If the difference is not large enough, the choice of selling (and buying something new) vs. holding doesn’t make much difference in terms of end result; and if one takes into account the “what if we never sold” results that TMF puts up, commissions, and the possibility of repeatedly realizing a loss etc., holding actually seems a better choice. Selling now and buying something new is a better choice only when one’s judgment now is significantly better than back then.

How does one know if one’s judgment now is significantly better than back then? I’m not sure (but I may find out later), but from my observation of myself, I tend to think that my judgment hasn’t improved that fast (if at all); and some stock now doesn’t look as attractive as before more likely due to the fact that the “newness” and initial excitement has worn off,rather than due to any judgment improvement (and the ones that are attractive today may equally become unattractive later).

So I’m holding onto my (seemingly) unattractive investments, at least for now – Saul, if you see this, it’s not that I’m unwilling to admit my mistakes, it’s just that I’m NOT SURE they ARE mistakes. I’ve been thinking about you selling something and buying it back shortly after, yes, you can do this because your long, remarkable track record gives you this level of confidence; me, I have neither a long, good track record nor that level of innate confidence.

Given what I said above, you’ll probably understand me not saying anything specific about each investment you listed :slight_smile: I hope it’s of some value to you nevertheless. And thanks in advance for any feedback on my thoughts.

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They say they will be in 200 countries by the end of 2016. Even when they enter a country, they have room to add subscribers for quite some time.

They truly are amazing if they can accomplish that task. though I think there is no single clear defined list of the number of countries, most have less then 200 countries. US recognizes 194. They better take down The Interview if they expect to get North Korea.

Did you mean 100?

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Here’s a test suggested by Hewitt Heiserman Jr. for established companies with consistent quality earnings and that are more or less self-funding. Apple and Disney fit that description.

-

3. Calculate market value 10 years out based on your required return (from Step 1).

APPL 603B annualized 10 years at 18.5% = 3,292B.

Several of us in this thread said to hold AAPL while one sold because it got too big. AAPL is already the largest market cap stock out there, can it possibly grow at 18.5%? Over the past 5 years AAPL grew by 24.2% annually (using the best fit line method*). Stock price growth has been slowing:


__Years  Growth*__
  20    32.4%
  15    41.3%
  10    33.9%
   5    24.2%

My point is this: AAPL growth has been the envy of small caps which is how it got so big in the first place. But we all know that this torrid pace cannot go on for ever. It has been slowing already. Heiserman’s ten year calculation would take you out of AAPL now but carefully watching AAPL might give you another five or ten years of great performance.

My problem with Heiserman’s and some other metrics is that they don’t take into account the dynamic nature of investing, things won’t stay the same for ten years. Of course, dynamic modeling is much more difficult and not readily available, specially for free, my favorite price for data. :wink:

The growth rates I’m showing above come from my own portfolio tracking software, a php web-app that can be served by both my website server and my home computer. The best fit lines are generated by phpExcel, an open source library that generates Excel spreadsheets in php.

https://phpexcel.codeplex.com

Denny Schlesinger

  • The best fit line method instead of using start and end points to calculate growth calculates an “average” slope or average CAGR, the red line in Klein charts.

http://invest.kleinnet.com/bmw1/stats20/AAPL.html

BTW, I’m not sure if the growth I’m showing includes dividends. I suspect it does because Yahoo prices which I’m using are split and dividend adjusted. The Klein charts also use the Yahoo data.

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This thread amuses me greatly.

New wave F/A types practicing their “voodoo” moving numbers around on the spreadsheets. Instead of Crystal Grippers at a New Age convention, we now have Excel Grippers using assumptions 10 years out.

F/A is getting more and more complex on Fool and it’s making me laugh out loud about every day now.

The devil is in the assumptions, boys and girls.

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I guess my big question is about what kind of return to want in the first place.

A total return of 20% sounds great, but… I don’t need 20% to be happy or successful.

Making a steady 12% would make me a very happy camper. Anything in the teens and I’d be thrilled.

So my expectations, especially for an Apple or DIS are not as high.

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The devil is in the assumptions

Exactly.

Hewitt’s book – It’s Earnings that Count – was focused on quality of earnings. He introduced an approach for looking beyond the numbers reported in the financial statements in order to identify companies with sustainable earnings growth. His method assessed the ability of a company to finance it’s growth and how successful it is in creating value. In the latter half of the book he addressed the more qualitative aspects of analysis such as evaluating management, assessing competitive advantage, and so on.

John Bogle, in his foreword to Hewitt’s book, wrote Using the principles in this book should give [investors] a fighting chance to win the game – truly an awesome challenge. Anyone who is familiar with John Bogle’s philosophy will appreciate the hoops he had to jump through to make this endorsement.

Hewitt’s test for valuation came near the end of his book – first you evaluate the business, then determine the price you pay. Anyone who has done a number of discounted cash flows knows that the results are only as good as the assumptions that go into the DCF. Hewitt’s test is just a twist on DCF, and suffers the same limitations. For example, the growth rates you come up with at the end are extremely sensitive to the terminal P/E you choose.

Hewitt’s test is meant to examine a range of outcomes, NOT to produce a single number. It is not a “metric”. It’s a method used as a sanity check after evaluating the business in order to test your assumptions. I agree with Mr. Buffett that most businesses will have such a wide range of outcomes that you can’t reach a conclusion about them. Only a very few will have such a narrow range of outcomes that it will be obvious the price is low compared to value. And I’m prepared to make mistakes.

Thanks,
Ears

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First the big ones that keep growing:
AAPL Feb 2013 +82% PE: 17
DIS Apr 2012 +154% PE: 24
PCLN May 2012 +89% PE: 26

Sorry, Brittlerock, I’m in a different time zone right now and I just got a chance to read your original post. Please don’t take my responses as the “right” thing to do, as obviously some of my decisions were wrong. They are just what I decided for me.

I thought Apple was too big to keep growing at any considerable rate. Clearly I was wrong, as your results clearly show. I have never had positions in DIS or PCLN and don’t know anything about them.

Kind of risky:
MNST Nov 2012 +228% PE: 50
AMBA Jan 2014 +139% PE: 48
HAIN Apr 2012 +149% PE: 49
CMG Feb 2014 +24% PE: 48 (OK - I should probably get out of this one)

I reduced my position in AMBA by a third when one of the MF paid services suggested selling a third because of heavy insider selling, and concentration of customers. I kept two thirds though, as they also suggested. I’ve never had a position in the others, but if you think you should sell Chipotle, you probably should. I’ve not been impressed when I’ve eaten in them, but I know you shouldn’t decide based on your own likings (or I’d still be in Apple), but on the business and how they do.

Then, there’s the crazy ones:
NFLX Feb 2014 +25% PE 132 (I was going to sell, it popped so now ?)
SWIR Sep 2013 +165% no earnings
ZLTQ Aug 2014 +54% PE: 841 (waiting for LT cap gain tax)

As far as SWIR, there are lots of companies out there with real earnings, and real earnings that are growing rapidly. I wouldn’t invest in a company where earnings are always around the corner.

I looked at ZLTQ, but I felt it was sort of shady and unethical and potentially taking advantage of people, so I stayed out. Having a PE of 840 doesn’t help much.

Saul

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Wow! I want to take just a moment to thank everyone who took time to respond to my post. I very much appreciate it.

I’ve read through everything, and my first impression is to move slowly or maybe not at all on most of the stock I mentioned. But at the same time, watch closely and be prepared to bail on some of these should they sour. I’m tempted to place trailing stop-loss orders, I have to think on that a bit. I also need to see if any of these have grown too large. I have to take more time to digest what you all suggested.

One person in particular mentioned that without knowing my goals, it was particularly difficult to respond. I should have added some words about that. At present, my retirement income meets my needs without touching my investments. I have two major debt obligations: my mortgage and consigned school loans for my daughter. At the end of this year, I will sell some investments and pay off my mortgage. I intend to move more slowly on daughter’s school loans - I promised to pay them if she was unable to. I needn’t expound on this. My plan is to make sure that enough is paid so that the principal is reduced annually. My daughter may surprise me, again (the fact that she got admitted to a masters program at Columbia was an enormous surprise) and shoulder more of this burden that I anticipate (which is zero). And, a new president and congress may take some action to mitigate the burden of school debt which now rivals mortgage debt. Both these obligations will be met by selling investments held in taxable accounts.

Other than meeting near-term obligation, my goal is to get an annual return on my investments of no less than 20%. If I can sustain that for 10 years (even with the drawdowns for the mortgage and my daughter’s school loans) I will have sufficient funds to very comfortably meet all our needs even in the absence of my pension and SS as well as the presence of inflation. At this point, my portfolio should be such that we can take an annual draw (mostly from a tax free account) and have a very comfortable life-style while still seeing the portfolio grow.

Frankly, before I started reading this board, I never dreamed this was an attainable goal. Now, it seems completely doable. Saul has a lot more experience than I do and he has successfully garnered 30% annually for an extended period of time. My goal of 20% is less ambitious but probably more consistent with my inexperience and I’m confident, somewhat less highly attuned 6th sense about the market. But what he does is not rocket science. For the most part, it’s very pragmatic and easily learned. Or so it seems. So far this year (the first for which I have kept good records), I’m on track to do much better than my 20% goal (about 9% for the 1st quarter) we’ll see if I can stay on track for the full year. 10 years, 40 quarters, I’ve already got 2.5% successfully under my belt.

Thanks again - if anything I just said about plans and goals instigates new thinking, please post again (or anew if you’ve not commented). I’ll be re-reading and note-taking for quite a while.

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Hi yorubaz. You asked:

The problem you presented is basically what to do with stock that one bought but wouldn’t buy today, to sell or to hold? If selling, the problem is, as you said, “it’s buying something better that gives me pause”; if holding, is one letting one’s unwillingness to admit a mistake get the best of oneself (as Saul likes to say), and missing out on better opportunities out there?

The way I approach it is this: if I would not buy that stock today because the thesis has changed, it is likely that I would sell it.

For example: I used to own shares of Atwood Oceanic. When I found out that the dayrates were falling in the industry that convinced me that the market was not as robust as their recommendation implied, so I sold.

If I would not buy that stock today because the valuation has changed, it is trading for a much higher multiple than when I purchased it, it is likely that I would hold it, or at least hold a portion of it. The reason for this is that I don’t believe anyone can value a stock with any huge degree of accuracy. I don’t necessarily want to argue with the market as I am not qualified to do so.

For example: Tesla had an incredible run when the stock just kept going up. Realizing what they are doing is so extremely difficult AND that their stock is priced at nosebleed levels, I sold half my shares. The rest represent house money.

JMHO

Jeb

19

“It’s pretty easy to say sell that one, I tell myself that almost every day, it’s buying something better that gives me pause.”

Sometimes when I want to sell something and don’t have a buy candidate ready, I’ll buy some VOO or VOE. It’s cheap and easy to get into and out of. I know some have argued it’s a good idea to hold some cash, and I do tend to hold maybe 1-3% cash which is not much. The rest I put into VOO or VOE until I see something more attractive. That may change if I get bearish on the overall market but right now I’m not.