On Friday morning I detailed my strategy for dealing with stock declines. Little did I anticipate that I would so quickly be exercising that strategy in an unexpected decline of what I would otherwise tell you is a 'favorite' stock of mine, Morningstar (NASDAQ:MORN). As I wrote this, Morningstar was trading at $28.01, down $4.52 or 13.89% on the day.
I acquired my 116 shares of Morningstar just a month ago, on January 21, 2009, at a cost basis of $33.53. On Friday I sold all of my shares at $28.00, for a loss of $5.53 or 16.5% since purchase. My sale point after an initial purchase was at an 8% loss. Since I enter these sales and purchases manually (rather an old-fashioned approach I suppose), this stock price blew right by my sale point and I incurred an even larger loss on this investment than I would prefer to take. In any case, the stock triggered a sale for me and I am now down to four positions: 50 shares of Haemonetics (NYSE:HAE), 90 shares of PetSmart (NASDAQ:PETM), 350 shares of Rollins (NYSE:ROL), and 154 shares of Sysco (NYSE:SYY).
Being under my minimum, instead of 'sitting on my hands' with this sale, I actually have a 'buy signal' to be adding a fifth holding to get back to my minimum of 5 positions. However, instead of looking to add a slightly larger position as I would do if I were at least at 5 positions, by making a purchase of 125% of the average size of the remaining holdings, I shall continue to shrink my exposure by buying a position at 50% of the average size of the remaining four holdings.
Looking for what triggered that downside move Friday, we can see that Morningstar reported 4th quarter 2008 results Thursday after the close of trading. Revenue came in at $119.3 million, slightly ahead of last year's result of $118.1 million. Net income for the quarter came in at $19.3 million or $.39/share down 3.7% from the $20.0 million or $.41/share the prior year. While this result is not surprising in light of the overall weakness of the economy, what likely triggered the rather extreme move was the fact that analysts had been expecting $.43/share according to Reuters estimates in the same article. Thus the company disappointed and failed to meet expectations.
Contributing to this drop in net income were the combined facts that "assets under advisement fell about 32% to roughtly $66 billion" according to CEO Joe Mansueto. In addition, the company's own expenses rose in conjunction with acquisitions to 2,375 from 1,720 employees.
The market did not take lightly to these results.
I still like this company, but I am definitely obligated to sell the holding within the framework of my own investment strategy as well as the announcement of fundamentally poor results.
I shall keep you posted on what and if I make a small purchase to bring my holdings back to my minimum of five.
Disclosure: The author sold his shares of MORN, and owns HAE, PETM, SYY and ROL.