Why I Sold Johnson Controls

A few moments ago I sold my 82 shares of Johnson Controls (JCI) at $15.60/share. I purchased these shares at $14.83/share on 11/20/08, so I had a gain of $.77/share or 5.2% since the purchase.

This wasn't a sale based on any pre-determined appreciation or loss point. This was simply my own decision that the fundamentals of the stock had changed such that I no longer felt it was an acceptable stock for my own trading portfolio. As I wrote this, JCI was trading at $15.69, down $1.38 or 8.08% on the day on the back of the 1st quarter 2009 earnings report released Friday.

JCI announced that it had lost $608 million in the first quarter working out to $1.02/share. A year ago, the company reported a profit of $235 million or $.39/share. Johnson Controls had pre-announced that it expected a loss, but the level of the loss exceeded the street's expectations. Thomson Reuters analysts had expected a profit of $.01/share removing charges. Even excluding those charges, JCI came in at a loss of $.14/share.

In addition, the company reduced expectations for the second quarter with guidance now to a second-quarter loss similar to the first quarter. This is below the profit of $.18/share expected by analysts.

The decline in sales for this company has involved far more than just the automotive sector, with automotive sales dropping 25%, Power Solutions business (vehicle batteries) declining 32%, and building efficiency sales off 4.8%.

I still like Johnson Controls for the long haul, but for the time being, I shall be stepping aside from this Wisconsin-based corporation.

This sale brings me back to my minimum of five holdings. I shall look to add a new position if any of my remaining five should so indicate. I shall also replace any sales of those five with a new but smaller-sized purchase should any of them reach a sale point.

Comments

[Livingstone:]

Mr. Freedland,

I have a few suggestions for your "trading" portfolio.

Your purchase of JCI was well timed in November at $14.83/share on Nov 20/08, however, you should have purchased a board lot of 100 shares to give you the ability to write a call option on your position.

During December JCI advanced to $20.50 per share and you had the opportunity to write an April 17.5 call for about $4.00 which would have reduced your cost to $10.83 per share. At the current trading price of $16.21 you would have an imputed 49% gain. If JCI advances past $17.50 by April 17 your shares would be called away but your gain at that point would be 62% in five months. If JCI's price does not change from here you would still make 49% (not including a $0.13/share dividend) in a five month period. JCI would have to drop to $11.23 per share and it would still equal your 5% return.

Ignoring the option strategy I question why you would be selling your stock on the day when JCI announced negative earnings close to the low point of trading for the day. If your portfolio is in fact a trading portfolio, you should sell prior to the earnings announcement because everyone knows that earnings season this year will be ugly.

Or, if you are a long term investor and using a conservative options strategy you would now have the opportunity to cover the April 17.5 calls at $1.50. Your average cost would now be $12.33 per share. At the current market price your postion would still have a 31% gain. If you still want to sell your shares at this point you have a much better return than what you have described.

It seems in your article that you still like JCI from a longer term perspective so you appear to be somewhat torn between a long and short term strategy. You have to choose one and then play the market on that basis.

Jan 18 12:45 PM

[User 44578:]

I got more out of the comment than I did the article. Thanks for commenting.

Jan 18 10:52 PM

[Robert Free...:]

Livingstone,

Thank you for your advice. Your points regarding writing calls are on the mark and may well be helpful to the investor that wishes to add this to their own regimen.

I have been sizing my investments on the basis of the size of my own holdings. As I build to my 20 position maximum, I purchase the number of shares that will reflect 125% of my average size holding. This is why I purchased the 82 share position.

When I am at my 5 position minimum and am replacing a holding, I purchase a position at 50% of my average holding.

I purchase shares with the hope that I will be able to hold them long-term. However, I sell those shares either if they should decline 8% after an initial purchase (or at other pre-set points if they have previously appreciated in price), or upon the announcement of some fundamental information such as an earnings report that fails to meet expectations or reduced guidance.

In this case you are absolutely correct that my timing was horrendous. But timing is usually judged by a retrospective view and that view is currently short-term. Hopefully six months from now, even my horrendous timing that day won't seem that bad upon analysis.

Thank you for your suggestions which are well-stated and informative. I am busy trying to develop a different sort of trading system which time will tell will be profitable or not.

And User 44578, I would agree that Livingstone's comments were more informative than my own entry which was a reflection of my larger trading system and view on the prospects of JCI rather than a comment on the utilization of call options to maximize one's profits.

Jan 19 08:32 AM

[Livingstone:]

Ok I understand your strategy better now.

In my case I also attempt to maintain all of my holdings for the long term.

For the most part I am a dividend investor but I also augment my income stream by writing options, so most of my holdings must pay an increasing dividend over time and must have listed options. I make it a priority to hold even board lots because of my options strategy. I have never had a stock exercised away from me and at any given point in time I might have five to ten open option positions on my portfolio of 15+ stocks. For example, in 2008 I wrote out-of-the-money calls on JCI several times on my postion and each time I purchased the options back at a profit or left the position open until expiry. Each time it reduces the original cost of purchase of my holdings.

Patience is the key with this type of strategy because you have to wait for the opportune time to write and cover. If you ensure that the option strike price is higher than your average cost it lessens the risk that you would be called away at a loss. If you are a longer term investor you hold the stock through the fluctuations anyway so options can provide some trading profits along the way and satisfy the urge to "trade" within the portfolio.

The fundamental premise here is that you must pick the absolute best stocks in the class because you aren't likely to ever sell them. JCI is one such company. A dividend aristocrat, with a 21% compounded rate of dividend increase over the past 5 years and a potential beneficiary of the impending infrastrucure initiative.

I am not as concerned about an exact percentage ownership in my portfolio to the extent that it would mean I would end up owning odd lots of shares. For example BA represents 5.4% of my holdings and JCI 4.8% but in both cases the number of shares represents an even number of board lots.

Jan 19 03:46 PM