I think even the most experienced investors come to realize that sometimes the hardest decision you make is when to sell. It does not seem to matter if the stock price is falling or increasing. Depending on the reason for the drop, a short-term dip in the price can present an opportunity to buy additional shares.
However, when a stock has been on a strong run, I will often protect myself against a selloff by using stop orders when I believe fair value has been achieved. This is where it can get tricky. I use stop orders to simply preserve capital and to protect gains. However, when a stock has moved quickly to the upside, it can occasionally take a sudden dip, triggering your stop orders, only to turn right around and continue to march higher.
I had set my stop orders a little tighter than normal, as I had anticipated that some of my stocks may have come too far too fast. I also had sell points set on part of my portfolio, which I believed to be fair value at the time. My theory was that as much as I liked these stocks, I could get out of my positions now and buy them back cheaper in a month or two or redeploy the capital in other value opportunities that existed.
While I did redeploy my proceeds, I have seen missed opportunities for additional gains in the stocks I sold. Sometimes you just can’t fight the market. However, if many of us had been more disciplined a few years ago, some of our portfolios would not have taken the beating they did.
The three stocks I sold were Leucadia National Corp. (NYSE:LUK), Biglari Holdings, Inc. (NYSE:BH) and National Fuel Gas Co. (NYSE:NFG). As I mentioned before, I think very highly of these stocks and their management teams; below I give a brief explanation of each.
Leucadia is a company that specializes in the efficient allocation of capital. The company owns businesses, in whole or in part, in many different industries from a 50/50 joint venture with Berkshire Hathaway (NYSE:BRK.A) to a nearly 30% stake in the investment bank Jeffries (JEF) to Crimson Wine Group, which owns vineyards in California, Oregon and Washington.
In addition to these holdings, the company also has exposure to the mining industry through its nearly 18% stake in Inmet Mining Corporation (OTC:IEMMF) and an 8% stake in Fortescue Metals Group Ltd. (OTCQX:FSUMF). The company also has revenue-generating exposure to timber, plastics, gaming, and real estate as well as oil and gas drilling services. As you can see, the company is highly diversified; however, the true strength of this company lies with its management.
The two leaders, Ian Cumming and Joe Steinberg, have been at this for over 30 years with a very enviable track record. The only concern to a new investor is that both gentlemen, while getting wiser, are also getting older. I am not sure how many years they intend to lead the company, but I am certain they have a very skilled management team that can fill the void when they decide to turn over the reins. I believe this team is in place already, bearing much of the operational responsibility and ready to step up when called upon.
I sold LUK after a 40% gain and decided it had reached that level a little too quickly. To my chagrin, the stock has continued to rise. I would like to see a pullback to under $30 per share -- and Libya may be giving me that opportunity soon. We will see if patience is rewarded.
National Fuel Gas is a diversified company that has operations in oil and gas exploration and production, natural gas pipelines and storage, natural gas marketing, and a regulated natural gas utility. Being known as a utility, this stock is commonly followed by the income-investing crowd, but I believe the real value is in its Seneca Resources subsidiary.
Seneca has oil and gas properties in the coastal regions of Texas and Louisiana, California and the Southwest. However, its crown jewel lies in the property owned in the Appalachian Region of the United States where the prolific Marcellus Shale can be found. The company owns over 700,000 acres of fee minerals as well as 260,000 acres of leased minerals. The ownership of the fee minerals is a key for this company as it can better control the exploration and production schedules. This allows the company to reduce exploration and production when prices are not favorable. The ownership of such a large fee mineral position is a rare attribute. In most energy companies the mineral rights are leased, and in most cases those leases are tied to exploration and production timetables.
I sold my position in NFG after a hefty 34% gain in a very short period of time. I believed I would get an opportunity to reenter the stock at a lower price, given that natural gas prices were already low and seemed destined to continue to fall. Once again, the market proved me wrong and the stock continued to rise. I would like to see the stock fall back to the low $60’s, but I believe the market is on to the opportunity the company provides with its stable income and exposure to the Marcellus Shale.
Biglari Holdings is currently not much more than a restaurant stock. The company owns both Steak n’ Shake and Western Sizzlin. However, the current CEO, Sardar Biglari, has much bigger dreams for this company. The direction of the company is to acquire other companies and use part of the cash flow from those acquired companies to allocate to other acquisitions and investments. To this end, he currently is attempting to acquire Fremont Michigan Insurance (OTC:FMMH) for $31 per share.
Much has been written about Mr. Biglari and many say, and even seem upset, that the company is trying to emulate Berkshire Hathaway and that Mr. Biglari is trying to be like Warren Buffett himself. While I am sure Mr. Biglari respects Buffett and his achievements, I believe he is most likely his own man with his own style.
The company recently announced that it was going to do a 1-for-15 reverse split and issue a non-voting B class of stock. The company seems to believe its stock is at times manipulated and wants to attract long-term investors. Again, all of the comparisons to Berkshire quickly came out. I do not believe the company is doing this to make itself look like a mini-Berkshire. I will in part take the company at its word that it is looking for long-term investors, but I also believe it is possible management may be attempting to shake some of the more activist investors loose, like Mario Gabelli, by making the stock very illiquid.
I made my initial investment in BH when many investors were upset that Mr. Biglari was trying to get a very lucrative pay package approved. This drove the stock price well below $300 per share. The incentive plan was later revised and the investor anger seemed to pass. The stock price quickly recovered and I sold after a quick run-up for a 36% gain. Once again, the stock continued to rise. I would like to see a 15% sell-off in this stock before getting back into the game on this one. This stock has been very volatile in the past, so it is not out of the question. The reverse stock split may present such an opportunity, depending on how large holders of the stock react before and after the split.
The jury is still out on whether Sardar Biglari can really become one of the great capital allocators of his time, but he appears to be headed in the right direction with his successful turnaround of a misguided restaurant chain in a very difficult economic environment.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BH, LUK, NFG over the next 72 hours.
Additional disclosure: At this time I am only contemplating a long position in LUK, BH or NFG if they fall into my ranges mentioned in the article.