Part 1 of 3
October was pretty active month for investment decisions. As the market continues to surge, I ended up taking a fair bit of investment decisions. Because of this I had to break up this post into several smaller posts. In Part 1, I share my thought process I was going through with several investment decisions involving controlling losses. In the other posts (here and here), I walk through my decisions to add a couple of new stocks to my portfolio.
Added to short position in S&P 500 Via (HSD)
As stock markets around the world continue to set record highs on an almost daily basis, my decision to hold on to my short position on the S&P 500 continues to stare and taunt me. It continues to be a very tough investment decision and I continuously go back and forth on whether to pare down the position. I just have a hard time believing that this continuous rally can be sustainable despite a mountain of data points and indicators showing the market to be ridiculously overpriced along with social-economic climate that is ripe to blow up. I still remain convinced that this is going to end quite badly and I have no idea what will be the catalyst, whether it is higher interest rates, Trump doing something beyond stupid, or just people saying enough. I decided to add more to the position to take the average cost down a bit further. I’m continuing to hold my nose. That being said, despite my pessimism with the overall market, I’m still continuing to buy well-run businesses that I think offer potential to grow in value and shed ones that are not creating wealth for shareholders.
Added to position in CVS Health (Ticker: CVS)
CVS continues to come under pressure. The stock at one point fell below $73. Fundamentally I think the company is still solid and continuing to generate meaningful Economic Profit, so I decided to buy some more to lower my average cost which is now about $77.
Having said this, the market is souring on the pharmacy business and it’s because of …sigh…Amazon. There were rumours that Amazon is looking at getting into pharmacy space and sure enough it was revealed that they had started obtaining licences to sell drugs in 12 states and counting. The stock tanked and fell as low as $69. Then shortly after, CVS announced that it is making an offer to buy Aetna Insurance for $60 billion. The move looks like a strategic play to build a vertically integrated health service system which would insulate CVS from a push from Amazon. The market liked it and the stock popped back over $70.
At first blush, it looks like a pre-emptive defensive move by CVS build a bigger moat by becoming a one-stop shop, be all things to all people health service company. The thing that I wonder and I need to digest this is that this model is quite similar to the one the financial services industry tried to do in the early 2000’s by combining wealth management, banking and insurance operations under one umbrella a la Citi Bank. That model didn’t end up well.
Held and then eventually sold shares in General Electric (Ticker: GE) for a loss of 27%
I had a bit a crossroads decision to make this month with the GE stock I hold in my son’s RESP portfolio. I think it is a best of breed industrial company. It’s divested itself of its financial divisions to focus on being pure play industrial/engineering company, which I think was smart move. The problem is right now it’s not sexy. It’s perceived as boring and old by the market, even though it is developing technologies and products that are going more environmentally friendly. The other problem is one of their main divisions which involves selling equipment used by the oil and gas industry is not doing well because oil prices are down and drilling is dried up.
In the recent earnings report, the company reduced its future profit estimates and that really ticked off the market. There was talk now of cutting the divided which really bothered the market. So the stock went down and I was seriously right on the door step of selling the stock. I thought the stock would tank and go below my loss threshold of 20 percent so I was ready to sell. I even tweeted it.
However, the stock didn’t tank. Instead of going down 10 percent, it only went down 3 percent, so I hadn’t crossed my loss threshold…yet.
What made me walk back from the edge was the fact that it was the first report by the new CEO. Often new CEO’s when taking over, get a chance to really look at the books and gauge the state of the company. Then they lower the bar and expectations by releasing all kinds of bad things. Basically trying to reset investor expectations. This is not abnormal. So I’m thinking the CEO is setting the comparables low to make future performance look much better.
The other element is management style. It turns out that the previous CEO Jeff Immelt was a bit of a corporate spender. Case in point, it was revealed that whenever he travelled (which I would think would frequently given the global reach of GE), he would travel on the corporate jet. That’s fine. Here’s the kicker. He asked that another jet fly with him that was empty and be on standby. What! Now if this isn’t an example of being full of yourself I don’t know what is. That’s ridiculous. Suffice to say the new CEO has eliminated this “perk”. It may be a symbolic thing, however I think it sends a signal that he’s not going to put up with some of this legacy thinking and entitlement culture that may be lingering in the company. This is a good thing and a sign that he is looking to change the culture of GE. Another good thing.
It’s these anecdotal elements that swayed my thinking and made me decide to hold on the stock a little longer. Having said that I have it on a short leash and at any sign of trouble, I’m done.
It turns out that moment came faster than expected. I sold the stock several days later as the stock kept falling and crossed my 20 percent loss threshold. I decided I had enough and despite my holding out hope that the company would turn it around, I looked at basic math and it didn’t make sense to hold on any longer. So I fell on my sword and sold it. It turns out that it was a good move as the stock dropped to below $18 as the company subsequently announced it was cutting its dividend in half and consolidating its divisions so I would have lost even more money if I let my emotions drive my decision making.
It’s been a roller coaster experience with GE, one that I did not expect to be in given the apparent stability it supposedly represents. There’s the lesson. All stocks, even the supposed blue chip ones are not stable. They can easily and violently go down. You can’t assume anything with any stock. You cannot rest on your laurels. You have to accept the loss and move on. I think there are still good assets and products that GE offers and if the stock continues to plummet, it could reach a point where I may revisit going back in.