What does it take to decide to sell?

Zoe’s Kitchen is a stock that I took a tiny position in a few years ago, and decided No Way! and exited right away, but this is not so much about Zoe’s as about the MF refusal to sell. Apparently they just announced earnings and fell 12%. I accidentally came across a 10% promise on the MF RB site. Here’s a paragraph from the 10% promise:

Shares of fast-casual chain Zoe’s Kitchen fell 12.5% on Friday after the company released its first-quarter 2017 results. Revenue increased 12.6% to $90.6 million in the first quarter of fiscal 2018, but analysts were expecting $92.55 million. The chain’s bottom line met meager expectations of a $0.01 adjusted earnings per share. Management also lowered its full-year guidance on multiple metrics. It now expects total revenue of between $314 million and $322 million, down from its previous forecast range of $325 million to $327 million. It anticipates comparable-store sales in the range of flat to down 3%, compared to its prior estimate of growth between 1% and 2%.

Then I see that
Zoe’s is down 68% since last August.
Zoe’s is down 57.6% since it was recommended in July 2014
Zoe’s is down 86.8% compared to the S&P, which has risen 29% since the recommendation

Then here’s the boiler plate:

Remember, Fools: We’re long-term investors here and it takes a lot more than a change in price to change our opinion of a stock. If we do find something worth reacting to, we’ll tell you ASAP.

I don’t follow Zoe’s. I didn’t read the earnings release or the conference call, but I have to ask: When does saying you are long-term investors mean sticking your head in the sand? If it takes more than a change in price to change your opinion, what does it take? Why is this stock still a recommendation?
Just wondering,

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

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It’s actually even worse than it seems. If you invested $100 in Zoe’s at the time of the recommendation three years ago, it’s worth $42 now. If you had put it in the S&P it’s worth $129. So in the next three years, if Zoe’s magically rose 200% (tripled in price), it would still be a little behind where the S&P is now. But the S&P on average will rise, what, 8% per year, compounded? Or something like that, so in three years one could expect that on average your $100 would be worth about $162.50.

If we do find something worth reacting to, we’ll tell you ASAP. How could the price drop to 42% of where it started, and they never found anything worth reacting to? I just don’t understand it.

Saul

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Agreed.

I have learned more from this forum in a WEEK than i had for a month before.

Hence today i dumped my biggest losers GILD and UA.

For GILD MF says it will recover in 10 years … what ? i think my money is spent better in something like CGNX which is going up NOW…

UA i just lost faith in, maybe it will recover but a long journey toward it.

I took these hits of 22% (GILD) and 50% (UA) as an expensive lesson, don’t take things at face value, plug the numbers into 1YPEG and you see a clearer picture immediately. Do your own damn research and decide yourself!

All the best!

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GILD, is a kind of a stock where nothing is fundamentally wrong with the company, just that the peaking of sales happened at slightly ahead of the schedule and at current price it is difficult not to be optimistic. Certainly their revenues are not going to go up, so may not be of interest here.

What does it take to decide to sell?

Insufficient expectations for the future or excessive uncertainty. Selling losers is vitally important for good performance. The difficulty is in separating the wheat from the chaff. Price, by itself, is not necessarily the best indicator.

When it comes to actual performance what counts is cash flow, the price at which you buy and sell, but when it comes to expectations anchoring, the price you bought at, is a bad idea. Clearly this is a terrible conflict that needs to be overcome.

Traders use stop-loss orders since they rely more on price movement than on intrinsic value. I believe this is the wrong tool for investors. As I wrote above, the right tool is estimating future expectations.

Zoe’s Kitchen is currently in an out-of-favor business. Inflation has failed to materialize and despite favorable employment numbers and corporate profits, purchasing power is weak and retail, of which dining is a member, is weak save for off-price and online providers. Depending on what your horizon is you might or might not stick with Zoe’s Kitchen. I would not but that is a personal choice.

I want to give a counter example, Novo Nordisk (NVO), the Danish insulin company. They had a 47.6% drop from the all time high on August 3, 2015. It went as low as $31.57 on November 23, 2016 from the $60.23 high. Since I was long, question for me was whether this was a dead duck or just a painful but temporary setback. The problem with the price was centered around the discussion of the high cost of US healthcare and more specifically around the price of insulin. My thinking was that the obesity epidemic was here to stay and even increase as large segments of humanity entered the middle class and adopted unhealthy Western eating habits. Lucky me, NVO is up 32% from the low and 16% YTD.

There are clear cut situations, it will/will-not recover, when the choice is quite simple. The big problems are the indecisive situations where you can’t make up your mind. The choice is bleak, to make the loss permanent or to make it possibly worse in the hope of recovery?

Denny Schlesinger

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Saul,
I too took a position in ZOES a few years ago, and I thought it was a good idea for others to take a look at ZOES too. I like the concept, and it is difficult for people who like heart healthy food to find fast, tasty food. I thought ZOES was a winner in a unique restaurant space. It’s revenue and cash flow were initially growing nicely.

To answer your question, what does it take to sell? My answer is always “my thesis is broken.” Here was my thesis:

  1. The heart healthy Mediterranean food trend will become increasingly dominant as evidenced by increasing same store sales.
  2. As ZOES scale increases, margins and cash flow will dramatically improve.

Well, my thesis only lasted a quarter or two, then same store sales started to poop out on me, and the “hub and spoke” model ZOES was using for expansion is now being blamed for cannibalization. Not sure why that would be if the store concept is truly great. As you pointed out earlier on this board (and I pointed out on the ZOES board), same store sales increases have to be supported by increasing traffic. One quarter, SSS were only positive because of price increases, traffic actually dropped! I did point this out on the ZOES board, and got a cordial response which I consider good. Most boards only want to hear the bull case on a stock while seasoned investors want to consider the bear case too. If anyone is interested in the plummeting same store sales discussion, you can get see it hear.

http://discussion.fool.com/1069/zoes-earnings-32610014.aspx

Even with the bear case well layed out, few cut bait, and many people held onto what turned out to be a poor investment this year. Long-term, I like the concept, but I have low confidence in ZOES management.

Best,

bulwnkl

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Saul, in defense of RB, there has been at least one RB article reacting to the latest quarterly results. And, RB does occasionally change “recommended” to either “hold” or even “sell.” But it appears that there also may be a problem because RB’s long-term buy and hold philosophy is mandated to come up with two new stocks to recommend each month, like it or not. Maybe RB would be better served by changing from recommending stocks on a fixed schedule (2 per month) to a variable schedule based on whenever they found a truly compelling story. But having to find 2 per month may result in some mediocre picks such as Zoe’s Kitchen.

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The choice is bleak, to make the loss permanent or to make it possibly worse in the hope of recovery?

The third aspect is opportunity cost. If you are hoping for a recovery what other, better investments could you switch in to that you think will perform better than the company that you hope will recover. Sometimes people get fixated on not losing on a particular investment when the better choice would be to reinvest into something that will grow faster than the one that you think will recover.

Chris

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The choice is bleak, to make the loss permanent or…

Hi Denny, I think that that is price anchoring. The price is what it is. It has no memory of where it came from. Waiting for it to go back instead of selling can represent a large opportunity loss.

For example, the MF RB could have sold and told their clients to put the money into Arista or Shopify, which are also MF RB picks, and both of which they like a lot, and their clients could have had a double in the last year in Arista, and a triple or quadruple in Shopify.

That’s a lot of opportunity loss while Zoe’s kept sinking and they kept waiting for it to come back. And if Zoe’s does come back in another three years to where someone bought it, the person can feel good that he got back to breakeven, and didn’t “make the loss permanent”. However he lost six years of opportunity to make money in a host of other stocks. As well as taking the very real risk that Zoe’s will never get back to where he can break even, and his money will be in limbo forever.

Saul

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Captainccs: so with novo you broke even in 3 years? Or am i reading wrong. Please see Sauls last post, i agree with him that i rather have my money not waiting to break even but making a proffit.

Saul,

This is the type of post that makes me stop and think. It’s so easy to look back and say what should’ve been done but it seems so hard to tell beforehand. Several stocks came to mind as I was wondering about your question. Probably first was EXEL, which had a terrible drop in price after a promising drug trial failed. No doubt, with good reason it would be (and probably was) brought up as one that should have been sold. But they had more trials going and insiders bought a bunch of shares. It turned out so far to have paid off well to hold on.

The second that came to mind for some reason was LGIH, which has been one of your favorites for a while. I felt like I had missed that one because I waited to long to decide. I finally bought a little last August for $32.25 and $32.90. It went up shortly afterward, but instead of feeling like I had made the right decision I just felt like it wouldn’t sustain the trajectory despite the case made for its results and so I sold at $34.74 and $38.25. Nine months later and the price is back in the $32 range. Sometimes market sentiment is hard to overcome. I’m glad I sold but still don’t really know why I should have. But it is still one of your largest holdings despite going nowhere for a while now and seems to be one of your strongest convictions.

Another that came to mind was TTS. Mostly because I just ran across the ticker a few days ago and wondered why it was still around. It seems like the original thesis has faded away and now it’s just a tile store.

I too think MF should sell more and sooner. I think it would benefit them if they didn’t have such long lists of recommendations. I get lost in them and ignore a lot of them. It’s one reason I’m cutting back to RB only and may even drop it when it expires in a couple of years.

Thanks for all of your postings here that make us think.
Steve

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Saul,
I 100% agree with you and Gaucho Chris on price anchoring. On the flip side, I am slower to purchase, splitting my buys, into a quarter or two until I have a higher confidence that the thesis is working, and I am slower to sell to make double sure my thesis broken than you were. I have lost more than you getting out of bad stocks, but avoided more trouble than most growth investors by limiting damage when I get into crummy investments. My batting average is about 65% over time, so it has really helped me. For me, with my cautious engineering disposition, I feel better taking a slower approach. I was tempted to say “a more measured approach”, but I don’t think that’s true. I think we just have a slightly different approach to investing. It just goes to show that there are a lot of different approaches to buying great growth companies. That said, I think EVERYONE owes it to themselves to decide on an exit strategy process before they get into any investment

Best,

bulwnkl

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i agree with him that i rather have my money not waiting to break even but making a proffit.

There are times when the price collapse is due to overall market conditions and the stock’s condition and business continues functioning profitably through the price collapse as investors panic as they throw their shares into the garbage can at lower and lower prices creating the best opportunity for capital gains for those that are willing to evaluate the situation at the time of collapse as opposed to their cost basis, based on the time they purchased.

Opportunity is always greatest, especially in troublesome times, if you look for it.

b&w

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<<Opportunity is always greatest, especially in troublesome times>>

When this has happened in the past, I’ve generally been unable to take advantage of the steep decline because I’ve been fully invested. On the other hand, outfits like Berkshire Hathaway are able to jump on such opportunities to buy low, because they keep a bunch of ready cash at hand.

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Hi Denny, I think that that is price anchoring. The price is what it is. It has no memory of where it came from. Waiting for it to go back instead of selling can represent a large opportunity loss.

You are on the same wavelength as Chris who wrote:

The third aspect is opportunity cost. If you are hoping for a recovery what other, better investments could you switch in to that you think will perform better than the company that you hope will recover.

And while I don’t disagree bringing it up makes a difficult choice more complicated. My point is to disengage buying from selling, each is difficult enough without having to pair them. :wink:

What I do, and I brought this innovation late to my game, is to have a buy wish list. Whenever I have enough cash to buy something, I pick it from my wish list. This solves the problem Fool zuzu3 brings up: “mandated to come up with two new stocks to recommend each month.” I “come up” with recommendations when I find them and add them to the wish list. When I have cash they have to fight it out to get bought. In my initial post I wrote as reasons to sell: “Insufficient expectations for the future or excessive uncertainty.” That’s opportunity loss! But it’s asynchronous from picking stocks to buy.

It’s the same recommendation but a different way of doing it. A stock only makes it to my wish list if I expect it to grow fast.

Denny Schlesinger

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Captainccs: so with novo you broke even in 3 years? Or am i reading wrong.

I’m still underwater with NVO.

Please see Sauls last post, i agree with him that i rather have my money not waiting to break even but making a proffit.

Of course I’d rather make money than break even. Who doesn’t? By the time the price of NVO collapsed the loss was there. The options were a) to hold on as an unrealized loss, or 2) to sell and have a realized loss. Nothing I or anyone could do would eliminate the loss.

NVO was still on the buy list. The thing to do was to see if at this new low price NVO is or not a buy. My conclusion, as stated in my earlier post, was that NVO was a good buy at that time at that low price. I actually added to the position on the big dip!

Didn’t someone say “buy the dip?” :wink:

Denny Schlesinger

BTW: I did reply amply to Saul’s (now deleted) post.

Of course I’d rather make money than break even. Who doesn’t? By the time the price of NVO collapsed the loss was there. The options were a) to hold on as an unrealized loss, or 2) to sell and have a realized loss. Nothing I or anyone could do would eliminate the loss.

I do think one does need to enter the other question into the equation when determining which is the better route to take. #1 or #2 above.

Denny pointed out that entering opportunity cost into the equation adds complexity and, indeed, it does. Yet, I think it is necessary complexity that can be simplified by conviction.

I’ve found that re-evaluating conviction will help me determine whether to hold or sell. That is really what it boils down to for me. But that is after looking at what has worked for me. Simply put, my higher conviction stocks have worked out better. That may change, but I’m sticking with it for now.

If you have found a better bang for your buck through diversification, then you may have a wholly different take on the subject and not want conviction to enter the equation, though that seems odd to me.

Take care,
A.J.

I owned Zoes for a while. But then went to a couple of ther restaurants. The food was fairly good, the decor was terrible ,locations less than prime, and most importantly there were fewer customers than other nearby eateries. There was little to attract me for repeat visits.
So I sold my ZOES. At near break even.

I am a believer in the Peter Lynch Principle. It sure helped in AAPL. And in TSLA.

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An older thread from this board on selling with more good thoughts: http://discussion.fool.com/on-changing-your-mind-and-selling-320…

Matt

Some of my biggest missed opportunities have been good to great companies that hit a bad patch and which I either didn’t stay in or didn’t use the opportunity to get in:

  1. NFLX: I always wanted to buy in, but was waiting for a better value point. But when the Quickster debacle happened, I thought Hastings had lost his connection to the customer (who wants to have 2 different queues?) and didn’t buy in. Stock has shot up hugely since.

  2. SODA: I never wanted this stock because it seemed like a fad. And it was a fad and the stock soon dropped dramatically. And then the company reinvented itself and it’s up. Yeah, still not above its previous ATH, but buying in on the business model change would have been a good idea.

  3. AAPL: After Jobs died, I thought the stock would die, too. And it did, but it took years for the Jobs product pipeline to run its course. I did buy some in 2012. And then the stock fell something like 40% in 2013. Profits were down; the iPhone was thought to have hit a wall. Even the iPad wasn’t filling the revenue gap. And, no new products on the horizon. I used this opportunity to add, and that added stock is up something like 140%, and it pays a dividend.

  4. CMG: Jury is still out on this one. We all know the story of tainted food and then the recovery involving changes that arguably hurt the taste. Stock went down to around $400, and is up 20% since. Is it on the road to recovery? I still don’t believe CMG will ever be as popular as it once was, and so doesn’t deserve the multiple it has still today.

I’m sure there are many others as well. Perhaps the thinking is that these are good companies that hit a bad stretch, but being run well they will pull out of it. I do think MF tends to be too slow, but I’ve seen how being too fast can get one out of a stock too quickly.

As for Zoe’s one of the services was considering buying more some months ago, but eventually decided not to. Obviously, they didn’t take the thinking far enough to actually get out. At the time I sold some Puts, which expired as income, so I guess I dodged a bullet there.

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