Investment Activity Review - August to October 2013

It has been a few months since I reported on my monthly trades. Summer and an 18 month old has that funny way of doing that to you. As we enter the last quarter of the year, I am taking some pause to review the trades made in the past few months.

Bought iShares Brazil ETF (EWZ) in August and Sold in October for 13.2% Gain
Back in August, anything that had anything to do with Emerging Market companies was getting tossed out to sea. The main driver was the signals coming from the Federal Reserve that it was going to slow down the pace of buying government bonds and injecting liquidity into the financial markets, in the hopes of stimulating growth. The “tapering” effect resulted in investors pulling money and capital out of emerging market countries, one of which included Brazil. In a short period of time the BOVESPA index fell more than 20 percent. Emerging market currencies also took a hit, most notably the Indian Rupee which fell to all-time lows versus the US$.

Not a great story but at the time I came across an interesting bit of research that showed that in the last 20 years, when the BOVESPA drops greater than 20 percent, there was a subsequent kick-up in the index the following year, and over 90 percent of the time the bounce back was in double-digits. I found it interesting and looking at the downright negative sentiment that was being imposed on Emerging Market stocks, I thought it would be a nice contrarian play. So I opened up a small position in the iShares Brazil ETF. Sure enough in early October, when it was becoming evident that the Fed was not going to stop the money printing presses, Emerging Market securities popped back including the BOVESPA. The ETF was up 13 percent. I decided because of the volatile nature of these types of securities to bank the profit. So the based on my experience, the theory seemed to hold true. Fundamentally, I still believe the Emerging Markets offer some great long term wealth creating opportunities, you just have to be prepared to withstand some shocks and be willing to jump in when sentiment turns sour as in the case this past summer.

Sold DirecTV (DTV) for 2.8% loss
DTV came up as one of the top screens in terms of wealth creation and valuation. Solid Economic Profit, clean balance sheet and cheap on a discounted cash flow basis. It was in a business that had a sticky client base and could generate predictable cash flows. It was also growing in Latin America and had a solid property in NFL Sunday Ticket. What was not to like about it?

It turned out there were a couple. The first was rumblings that Google was looking to pick up the Sunday Ticket when DTV’s contract expires in 2014. Sunday Ticket was a big hook for DTV and losing it would be a game changer for the company. Second, the whole nature of the cable/satellite space appears under threat. The Internet has fostered companies like NetFlix and Hulu to disrupt the environment by offering cheaper alternatives to view content from a variety of media and not just a standard TV. Holding DTV was going to test what I know and feel about investing in companies in a disrupted industry like cable/satellite.

Right now the threat has not contaminated DTV’s earnings. It’s still a cash cow. The company has attempted to thwart these clouds by first bidding to buy Hulu which was pulled when Hulu backed out and also with its hard lobbying to the NFL to keep the Sunday Ticket Rights. Unfortunately until we see positive movement on these, I feel a cloud is going to hang over the stock. These disruptive forces out there were enough of a potential game changer moment for me that I decided to cash out now instead of down the road, so I took a small loss. I’m figuring that until these clouds clear (i.e. NFL renews the Sunday Ticket deal etc.) I would rather look out for some more stable businesses that could offer the same potential at a lower risk profile.

Sold FedEx (FDX) for 24.2% gain
FedEx is a classic company I love to own. It is a dominant player in its segment, generates consistent Economic Profit and has a clean balance sheet with little debt. It is also considered by many to be a bell-weather and proxy indicator on the global economy and tends to track the ebbs and flows of economic activity. Of late the trend has not been good, it is still profitable but not profitable for Wall Street’s liking. The concern being volumes were down and also clients were not using the high margin overnight service, preferring instead to use ground, multi-day shipping which are less profitable. The stock was languishing in mid $90’s. I thought this would be an ideal time to enter because if the economy is tepid like the company is saying then there is more likelihood of upside when the economy eventually picks up steam. So I bought in at $96 and was willing to hold on for a long period until things started picking up. Management also was signaling that they were willing to undertake some measures to jack up the earnings including share buybacks and some cost containment. The market started to like what they heard and over the past few months the stock picked up. Once is popped over my 20 percent return threshold that I seek, I decided to sell, even though there was a chance it go higher (it as since gone to as high as $127). The experience I had investing in FedEx served to me as an example of how to invest in cyclical companies. The basic rule is also the universal which is to buy low (in times of economic malaise) and sell when you have reach your threshold and times are good. You have to really be willing to go against the grain.

Sold CLC for 37.1% gain
As I commented in July in September the deal by LifeLabs to buy CML for $10.75/share was approved so I officially banked the profit to realize the 37 percent profit.

Year to date, I have sold 10 stocks of which 6 were sold at profit and all 6 were sold at double-digit returns. At the same of the other 4 stock I sold at a loss, 2 were at greater but capped at the 20 percent mark.