We are a long-term investor of client money that, depending on the client, can either see us sitting on positions for a few months or few years at a time.
Any advisor that has lived through a bear market (not to mention 2 bear markets) is never the same investor after seeing a 50% correction in the S&P 500.
Risk management becomes as much an issue as return generation, particularly for individual client portfolios.
Here is what we've sold in 2014 so far and why:
Russell 2000 ETF (NYSEARCA:IWM): We sold all of our IWM, which was bought in 2013, simply as a momentum play. We are not really small-cap investors for clients, but the technicals and the backdrop to last year led me to conclude the asset-class play was worth a shot. It was an easy way to get alpha with one trade, or one decision. The small-cap space is currently the most expensive asset class of the major indices, so we sold the IWM in early Jan '14 near $111, after the Jan '14 correction started in earnest.
Financial Select Sector SPDR ETF (NYSEARCA:XLF): We have been overweight Financials for some time, as far back as the fall of 2012, based on how stable the Financial sector estimates were as we approached 2013. We didn't buy the XLF until April, 2013, but had all the big banks and brokers prior to that point. The XLF was used to further increase our sector overweight. As far back as September 29, 2012, we started to turn positive on financials as our blog shows. We had numerous other citations of the improvement in earnings estimates for the sector as we moved through late 2012 and into 2013. We sold the XLF on the first day of 2014 at $21.75. It isn't that I don't think Financials will do well this year, but I do think that 2013's sector earnings growth of 20% (versus the 6%-7% S&P 500 earnings growth for 2013) won't be nearly as great in 2014. Loan loss reserve releases have driven so much of the Financial sector's earnings growth with no revenue growth, that I have taken clients to a more neutral weight than overweight in 2014.
Goldman Sachs (NYSE:GS): Simply put, the horrific Washington regulation, Dodd-Frank and the death of proprietary trading took a lot of lead out of Goldman Sachs' pencil, not to mention a lot of the money center banks. I think the big banks are going to be forced to hold more capital, with far less of a return, against lower "risk", and long-term lower ROEs, than any time in the last 20 years. We are still long JPM and Schwab (NYSE:SCHW), with Schwab having little or no principal or proprietary trading risk, so I think the next few years will see other financials outperform. I think the death of prop trading will cost GS $10 a year in EPS, in a decent market. I think it will be a long time before GS sees the November '07 high of $250 per share.
I think the investment banking and IPO business is changing too. Although it came public a while ago, the Google IPO (long GOOG) taught me that.
The business has been neutered to a large extent, and until regulation gets less constrictive and restrictive, returns will be lower in Financials.
We sold our Goldman Sachs in two slugs: $177.75 and then $171.50 both in Jan '14.
We'll have more on our Financial sector big picture thoughts in the next few weeks.
SanDisk (SNDK): In hindsight, it's maybe not the best trade since we decided to keep MU, but the tremendous supply volatility in DRAM and NAND flash semiconductor companies make the sector very tough to predict. We started buying SNDK in small quantities in the high $40's and $50 in early 2012, were crushed on the very bad guidance thanks to oversupply and weak yen, and ended up buying more all the way down to the low $30's through mid-2012. By that time, clients had a 4%-5% position, and we caught the yen weakening and the constraint of supply which all companies are now saying is permanent. SNDK could take out its Jan '06 near $79 if in fact supply continues to be tight and ASPs remain strong, but we had such a big gain versus our cost basis we sold the remaining SNDK position at $70.25 in early Jan '14. We are still long Micron (NASDAQ:MU) and Intel, since the Elpida acquisition might have really helped MU remedy its serial capital destruction over the last 12 years. However like SNDK, MU's fundamentals can change in a hurry, and that stock is always poised for sale. Frankly SNDK's and MU's relative strengths have looked impressive so far in '14. We might regret the sale of the NAND flash giant later this year.
Amgen (NASDAQ:AMGN): A more value-oriented, large-cap pharma play rather than a hyper-growth biotech play, AMGN has had a huge run since its late 2011 lows under $60. We didn't start buying until the low $70's though. The real catalyst to the stock we felt was their share repurchase plan which reduced AMGN's shares outstanding from 960 million on in Q4 '10, to 766 million in Q4 '13 or a 20% reduction in share count in just under 3 years. However, now with the Onyx acquisition and the bet on Krypolis, AMGN is stopping their share purchases, and making a bet on pipeline growth, which isn't bad, it is just different, and a different risk - reward for the shareholder. It is a bet on the future rather than a bet that management will spend cash.
AMGN has been growing their dividend 30%, and it is now up to $2.44 per share for 2014, which is closer to a 29%-30% payout ratio and more in line with a mature business. Dividends aren't bad, at all, it is just that I liked the simplicity of the share repo.
The catalysts are changing and we decided to sell all of our AMGN at $123 in the last few weeks.
A trade down below $100 and we would get interested again.
Coca-Cola (NYSE:KO): Probably the trade we'll get the most blowback on from the retail investor; we sold all of our KO yesterday after the horrible frustration of watching this stock for years do nothing, with a deadbeat management team. Case volume has been 2%-3% for years, and the valuation is never really compelling. However, the dividend is nice, but it just wasn't enough. The stock trades horribly. Low single digit earnings growth for what seems like forever with a high-teens multiple is frustration galore. There are better values in consumer staples. Looking at the weekly chart of KO, since its peak in August, 1998 near $45, KO is down 15% (excluding the dividend), while the S&P 500 is up 80%. That is just remarkable under-performance.
Those are our big sales so far in 2014. We've had shorter-term trades but nothing of the size or gains as the above. These were bigger bets some of which paid off (IWM, XLF, GS, SNDK, AMGN) and some that didn't .
We may end up buying some of these positions back particularly if they correct a whole lot. It just depends on what happens.
The trade that has worked against us so far in 2014 to the greatest degree is the TBF, which is the unlevered Inverse Treasury ETF. The rally in the 10-year Treasury was definitely unexpected, given what we thought would happen.
Commodities and defensive stocks look to be leaders so far in 2014. We are looking at those areas when we put some of this cash to work.
Disclosure: I am long MU, INTC, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.