question’s always the same; “Should I stay or should I go?” No humiliation applies in any failure there. Stocks are not a love affair, exactly. Everyone takes their turn in the spank line, in stocks and love. Enjoy it, especially when it’s someone else’s turn. We do.
Being paid is why we all do it. The risks we take are why we’re paid, and others are not. We work our asses off, yet stared like some goofy stuffed animal as macro concerns drove cash out of high-multiple growth stocks. The move punched a fat drain hole in three of our positions. We’ve ridden Alteryx, ETSY and NBEV down like ticking time bombs. All have gone off ugly-time. Now what?
Unwinding ugly is often painful, but much less so then conducting no salvage at all. Our first move is getting positive about it all, and examining each position closely. Now we’re sharing some takeaway with you. Enjoy. STOCKjAW addresses the problem…”Leaving, When You’ve Lingered Too Long. Salvaging a Smoking Stock Position.”
alone won’t solve a smoked stock position. Add two cubes of patience, and a splash of positive attitude, and it all gets better. Really. Job two is understanding what’s going on. Feeling like a dunce seems inevitable. Yet is it? It happens to everyone. Why bother to feel bad? Sector rotations change prices. We don’t sell for those. We do buy on them.
However, this market is being shaped by a trade war, slowing growth globally, and late-cycle bull market conditions. That’s different. We’re reshaping our entire portfolio now. “Too late” you say? Not really. Gotta do it. When bad things happen to good stocks we ask each question all over again: Is it the company, the stock, the market, or the macros? Our specific problems are Alteryx, ETSY, and New Age Beverages. All are secular growth stocks, capable of growing in a slower market. But they’re expensive, non-dividend-paying, and thus reviled by the risk adverse.
We stared and watched as these growth stocks were savaged, comfortable in the glow of their strong fundamentals. We did nothing as the acid of fear ate them up. Denial played a part. We believed them to be exceptions. There are no exceptions. When conditions become uncertain, and earnings estimates begin to decrease, all are effected, period. Rotations within an on-going bull market are relatively short lived. This rotation out of growth and into safety was driven by wide-scale macro concerns will potentially very long lives.
Hope isn’t a thesis, nor denial a form of protection. Clinging to confusion isn’t any better than the first two. That’s what we did and now we’re mopping up and sharing our mop water with you.
caught in the act of being human is part of investing. No one has all the answers nor performs well all of the time. Many things are simply judgment calls, with no pat answer. That includes position salvage. Here’s one. Investors Business Daily believes that losing positions are always cut at 7%. Period. Buffet, on the other hand will ride things down double digits, while maintaining a very long term perspective. Think Wells Fargo, and ten years. We watched him ride WFC down 30%, and justify said over a ten year time frame. Therein lies our problem. We failed to choose–7% or simply hold quality.
Patience, not panic.
It’s impossible to react, and think, simultaneously. Bad things happen to even the best companies, and their stocks. Invest in individual stocks enough, and it won’t take long. The best time to consider your situation is before you lock in a loss. “Realized losses” are a finished product. “Unrealized losses” are an on-going challenge. Even the most diligent and seasoned can not tell the future. We feel that patience pays.
Listening to Jim Cramer is an acquired skill. In our view, Cramer is the single best source of stock investing wisdom going. He routinely points out that “Panicking never made anyone a dime,” and that “There are broken stocks and broken companies.” Knowing why a position crumbles always provides the best way to handle it. Individual industries routinely face issues of their own, in addition to and in response to, macro-economics.
The Canadian canabus industry has for example struggled with multiple issues since legalization last October. As a result shares prices across the board have fallen, dramatically, but unequally. Too many companies were launched, execution issues separated lower quality operators out as they reported poor results, supply issues affected some, such as Tilray, and demand forecasts were too high. The point is that declines in these names are likely to last. Canabis stocks have been revalued, not simple temporary victims.
ETSY Inc. ETSY: NASDAQ 10-18-19
Take what you’re given.
STOCKjAW has for months been dealing with two very different cases. We own ETSY. ETSY’s been beaten horrifically due to its’ high multiple. High multiple stocks are routinely beaten first when macro fears and slowdowns occur suddenly. It was. Yet ETSY is a secular growth stock, meaning it can thrive even without a strong economy pushing from behind.
The market-wide rotation into “defensive” plays such as dividend paying utilities, foods, and real estate, sucked money out of ETSY. Even at 25% down, we felt sure it would return. Nothing was wrong with it’s thesis, fundamentals, or operation. Waiting made sense, despite the possibility that its’ share price could very well drop more.
consider anything down 35% or more to be “dead money.” Dead money is widely felt to be a decline too great to lock in by selling. Waiting for a possible rebound is generally considered the better option. We think so. Obvious exceptions exist, such as biotech companies with one failed drug, or bankruptcies.
ETSY’s management and fundamentals are strong and the fourth quarter is by far their strongest of the year. That’s retail. We have continued tracking the company’s fundamentals as the share price dropped, knowing the company was good. We also knew the fourth quarter would provide the best opportunity to reduce or possibly close our position. ETSY jumps more then 10% in after-hours trading when they report.
ETSY Inc. ETSY: NASDAQ 10-18-19, before open.
took advantage of two moments of relative strength to reduce our exposure to ETSY(both marked SELL on the above chart.) We sold shares twice; first on 6-9-19, and again on October 11th. In total we cut our position nearly in half, thus locking in a total loss of $99.01. In so doing we took $4500.00 off the table, and out of harm’s way. We felt, and yet do, that $100 loss was worth the risk reduction. Trade wars are inherently unpredictable, as are fellow shareholders as times grow increasingly uncertain, and downside weighted.
Two additional considerations apply. For anyone using a taxable account, capital gains losses are deductible. “Harvesting” such losses is a strategy. We’ve been ramming money into a Roth IRA forever, eliminating all taxes. Secondly, manipulating your Cost Basis Method(CBM) can be a huge win. Our efforts with New Age Beverage are an example.
New Age Beverage(NBEV) is an organic drinks company based in Denver. It’s a speculative small cap with amazing potential and strong fundamentals. Despite both, its’ now hated for its’ high multiple, and its’ speculative nature. Our position went double-digit negative, and then more so, in fat chunks. While underwater we waited for a strong pop. Why? Because we know it has that history.
October 17th NBEV jumped 26.4%, on no news. That’s institutional money. By the time we locked in our trade it was selling at a 23.6% jump. We knew to take advantage of this jump, rather than solely waiting for a trend reversal recovery. In our opinion, New Age will not recover until the trade war is resolved, and more certainty returns to the market. The market’s risk adverse. We knew to sell right that minute because every spike in NBEV melts away, typically completely within hours.
Stock purchases are tracked in ‘lots.” Selling from a position with multiple lots is controlled by the selected Cost Basis Method(CBM). First-in-first-out(FIFO) is the default setting. By adjusting our CBM we changed a $1005.00 realized loss into an $83.00 loss. Continuing to own shares allows the opportunity for some recovery over time.
The tools used matter. Many track stock moves using “percentage change from open.” That method does not display “after-hours,” or “Pre-market” trading. “Change from open” tracking leaves gaps. We use “Percentage change” which tracks all trading, thus displaying the complete move from the previous close to the next close. Why note this?
Trading continues after the “close” each day. Tracking your stock’s moves can only be accurate when including “After-hours” and “Pre-market” trading.
Charting typically does not display complete moves, thus we see shares “gaping-up” or “gaping-down.” Good charting tools can be set to include all trading. Why is this important? The massive move NBEV made is only partially displayed by normal charting settings, thus not fully recognized. NBEV’s true 26.4% move is thus recorded as a 12% move, when measured “change from open,” as opposed to its’ real move from previous close to current close.
You can’t win if you don’t play. The vast majority of people do not invest in individual stocks. The bone-simple fact that you’re reading this proves that’s not you. Congrates. Losing positions are part of it, for everyone. Absolutely no one escapes without them. Many times doing nothing, intentionally, is your very best move. Knowing your company, and why it’s being beaten bloody, is your No. 1 protection. Turning off your computer and your mind is your No. 1 threat. Keeping punching. We do. Good luck and good investing.
That Investing Journey
Thanks for Reading.