Investment Activity Review-September 2014

After a somewhat low key summer, I decided to make a few moves, but not after a great deal of back and forth.

Sold Apple for 46.4% Gain

The last few weeks of August saw me having a lot of conversations about whether to sell Apple…some of them on Twitter and in my last Investment Activity report.  Many of my expectations were met. The stock had well surpassed my personal return threshold of 20 percent.  I always thought if the stock could rise up to the split adjusted price of $100 per share then I would bank the profits. Then my greed avatar would speak up and say that I should still hold on and ride it up. The big reason being the new iPhone was going to be released in September and also perhaps we would see the iWatch make an appearance.  Historically in the run up to new product releases, the stock moves on anticipation and then sells off on the actual release. I decided to take that same track and sure enough the stock popped up near to the $100 mark before the release.  On the day of the release, I decided to hold on to the position and see what would happen. Sure enough the stock fell 3 percent, despite the fact the company pretty much delivered on presenting 2 newer and larger iPhones PLUS a new payment system PLUS the new Apple Watch which for someone who hates watches, couldn’t help but be impressed. It was classic Apple and reinforced  how much they still got game when it comes to clean, simplistic design and execution. So why did I sell? As I said, many of the conditions for the stock price were met, and I felt it was important to be consistent in my strategy and not let the emotion get in the way. I think Apple makes amazing products and is printing money like nobody’s business.  Can the stock go up higher? Of course it can. As much as I love the company and the products, I had to take that emotion out of the equation and focus on the portfolio. I just felt personally more comfortable to take the profits. All that being said, I wouldn’t hesitate to buy back in on a pull back or in overall market decline.

Owning Apple has been a good test for me personally as it allowed me to apply one discipline I was looking to improve on this year, which was to try and hold on to my winning positions longer and letting them run up. The past few years, I’ve been pretty programmatic to sell stocks when they cross my 20 percent return only to see stocks move up further. 

In addition, one of my core strategies is to buy companies that are out of favour with analysts and other Smart Money People. I started buying Apple in November 2012. Even though the company was selling millions of iPhones and iPads, the Smart Money People were not satisfied. They pontificated that Apple had not invented anything meaningful  in recent quarters. They said the iPhone was too expensive and they were pricing themselves out of the Emerging Markets.   It was getting to the point that Apple needed to cure a disease every quarter to just gain acceptance by Wall Street. So the stock fell off a cliff from its all-time highs, despite the fact the company was creating buckets of economic profit. It became a crazy value stock and I thought I don’t think I could get a better price for the stock than at that point.  

I would consider Apple to be a textbook example a company I like to buy. A well run, well-managed businesses with clean balance sheets and the capability to create tangible wealth from its scarce capital that is selling at a discount mainly because of a negative sentiment by the market. It’s a very tough thing for investors to do because we are not wired to associate ourselves with something out of favour. We want to be on the winning team. Unfortunately chasing winners is not a very profitable venture when it comes to investing in stocks. You have to be willing to swim upstream and zig when others zag. You can overcome this and rewire your thinking by first having a solid understanding and conviction that well run businesses will  command higher stock prices over the long term. Once you have “convinced” yourself the business is solid and performing well, it becomes about buying it a reasonable price that will allow participate in that future value creation. Apple very much fit that bill and at times when the stock was languishing in the high $300 (pre-split) and far from it’s high’s of the $700’s, you do question yourself if you are doing the right thing. From my own experience, more times than not these type of companies will eventually regain and realize their value.

Sold EBay for gain of 1.4%

I wrote my observations below before EBay announced it was spinning off PayPal. While I’m kicking myself for selling early, there’s no way one could predict when the deal would go down. Even so it appears that my reasons for selling which I explain below may have played a factor on why Management did a 180 on their long standing opposition to spinning off PayPal.

EBay has posted pretty strong numbers and it is very much a cash cow. The company generates very high returns on invested capital and has very pristine balance sheet. The stock from a discounted cash flow perspective is valued in the $70 range. So I decided to sell it. Why?

EBay is really all about Paypal. The wealth that is created in the company comes from its payment business. If you were to spin off PayPal like Carl Ichan wishes they would do, you would essentially get EBay the auction website for free. On its own I think this would make sense of PayPal, however I think EBay may be facing one of those Game Changer moments I talk about.

I view the entry of Apple Pay as a Game changer moment and a negative one for EBay. Looking at in theory. Apple has access to about 500 million credit cards through its iTunes ecosystem. Research has shown that Apple customers spend as much as 4 times the amount on line than Google/Android users. With half as many users as Google/Android, Apple gets twice the app sales ($10 billion, up from $7 billion in fiscal 2013).

Essentially I think we can see 2 main online camps for payment, the iOS camp which would use Apple Pay and the Android camp which would gravitate to PayPal.  PayPal I don’t think will go away but it could become muted given the demographics and geography of its users.

Of course this is all conceptual. Apple hasn’t put its system into operation and it can easily become a dud. Paypal is a known an entrenched commodity. They may have enough invested in the game that they won’t be hurt at all.

Judging by the initial reaction, investors seem to be concerned by it and it made me pause and ponder. Based on this my thought was to perhaps sell it now, wait to see how things shake out and maybe jump back in at a future date. Stay tuned!

Well we now know how things shook out….

With PayPal a separate company, it becomes suddenly an interesting takeover target for a company like Google or Facebook who are dying to get into payments and have failed on previous iterations. So my logic seems to be playing out, it’s just I didn’t see the cash out prospect take hold so fast.

After my immediate disappointment when some of my investment decisions go sour (it really didn’t in that I didn’t lose any money), I try to keep going back to some basic principles of investing which is, yeah you will make decisions that don’t pan out and when they do, you have to take on the mindset of a corner back in football who just got burned for a touchdown or a goalie who let in a goal. You have to turn the page fast and move on. Get back up and continue to play. You can’t get hung up on the failure or else it will cloud your judgement and make you more hesitant. Learn from it and turn the page.

 

ADDED to short position on S&P 500

I decided to continue maintain my short position on the S&P 500 buy averaging my down my position every few months. My basic premise still remains that I believe the stock prices in general are very expensive and are only maintaining these levels as long as Central Banks keep interest rates artificially low. At some point in the next 12 months, something is going to move and I don’t think it will be pretty for stocks.

OPENED POSITION in Las Vegas Sands (LVS)

Casino stocks have been getting hammered this year. The two big players, Las Vegas Sands and Wynn Resorts have seen their stock s plunge as much as 21 and  18 percent year to date respectively. Unlike its name sake, Las Vegas Sands makes is cash in Macau and over the past few quarters gaming revenue has been falling there as a result of crackdowns in the Chinese mainland by the government and the general slowdown in the Chinese economy. Suddenly many high rollers are cutting back on their trips to Macau just to avoid calling attention to their spending ways. Despite this, Las Vegas Sands continues to create meaningful levels of wealth. Returns on Invested Capital are still at very healthy levels and well excess of its cost of capital. Compared to Wynn Resorts, LVS has a more manageable debt level and cleaner balance sheet. The stock was trading in the high $80’s as back as February but has now fallen back and crossed below the $60 level.

There are other potential issues with gaming in Asia. There are rumblings that the Japanese government is considering loosening gambling rules and enable more legalized gambling. The Abe Government has a ton of debt it neads to whittle down and gambling may provide that solution. Next to the Chinese, Japan are pretty hard core gamblers and are significant client at Macau.

These issues are concerns but I think they are short term concerns. Macau is very much the Las Vegas of Asia and much of the big players are willing to put down big money to keep it that way and one way is over the top “experiences”.  Case in point the recent order by Macau real estate mogul Stephen Hung of 30 custom Rolls Royces worth over $20 million for his new hotel. The order was the largest in the history of Rolls Royce. You do not put this kind of cash down unless you think things are going to get better. Mr. Hung clearly thinks the high roller gamblers are going to continue to seek out a playground for the ultra rich. Analysts have been slamming the gaming stocks. I’m always looking to see what they hate because there are always buying opportunities. Despite my belief that stocks overall are overpriced, I’m thinking that LVS fits my profile of companies I’m always willing to buy, which I will repeat for the umpteenth billion time; well-run, well-managed companies that generate tangible, consistent Economic Profit, have clean balance sheets, that are out of favour and sell for a discount. LVS seems to fit the bill so I decided to open a small position. If the markets eventually tank, then I will likely add more to average my costs down. Could revenues continue to fall? Absolutely, but I’m not in it for a quarter or a half-year. Eventually the pendulum swings the other direction and I’m willing to be patient and wait for it to turn. Even if Macau stays in a funk, we can’t forget the grand old lady that is Las Vegas has seen a turnaround in visitors and gambling volumes which can provide some buffer. Oh yes and also there’s  a 3.2 percent dividend yield on top of that. 

Overall, September has been a really challenging month for me. I've had to wrestle with some pretty tough decisions. The good news is that they involved taking profits and at the end of the day, banking profits is never a bad investment decision.  I continue to learn and discover that   decisions on when to sell can be just as or even harder to make compared to figuring out what to buy. In every case I find myself coming back to core investing philosophies to guide and frame my decisions.