This article is part of our Rising Star Portfolios series.
Long-term buy and hold investing does not mean "buy and forget." Even though I practice this investing within the Messed-Up Expectations real-money portfolio I run for the Fool, it still requires keeping track of company performance to see whether one should add to the position.
Or, as is the case today, not.
In a recent review of tech company Nam Tai Electronics (NYSE: NTE ) , which holds a small position in the portfolio, I've come to the conclusion I can no longer justify its presence there. What I originally thought of as a "messed-up expectation" has turned out to be "spot on." Three items have led to this realization.
First, the company has very little moat. One of Porter's Five Competitive Forces is the bargaining power of customers, and Nam Tai is suffering from being in the weaker position. In the latest quarterly report, for instance, management discussed the fact that, even though one of its customers had caused delays in production, the expenses Nam Tai incurred during the delays were not being fully reimbursed by the customer. Either management left such reimbursement out of the contract, which to me wouldn't be a good sign, or its customer holds all the cards.
Technology companies can have strong positions relative to customers. For instance, Intel (Nasdaq: INTC ) has a strong brand and can dictate terms to its customers, rather than being dictated to. However, Nam Tai is entering the field of making high-resolution LCD modules for tablets and smartphones. This is an area where, according to its own admission, competition is fierce and margins are low. This situation is not conducive to being in a strong bargaining position.
Second, a risk I mentioned in the original write-up -- the delay in gaining access to land in Guangming, China -- has continued. Without approval from the local government, it cannot begin building new production facilities, which will hurt revenue and profits down the road. Current expectations are for access sometime this year, but I wouldn't be surprised if that extends even longer.
Third, the company's financials have deteriorated markedly. When I originally purchased shares, Nam Tai had a history of making money, even during the Great Recession, something its competitors Jabil Circuit (NYSE: JBL ) and Flextronics International (Nasdaq: FLEX ) couldn't manage. A bit over a year later, that's reversed, with Nam Tai posting a loss, while the others have posted profits. Granted, part of that is due to the company's switch to a lower-margin product mix, but when doing so, it has to make up for it with volume to remain profitable. Unfortunately, it hasn't done so. Further, in entering this new market, it has to take market share to survive, but given the power of customers, I'm not sure how it will be able to do so for the long term.
All in all, the situation has not improved from when I first named it a "messed-up expectation," and I do not see it doing so. Therefore, I'll sell the portfolio's remaining position, lick my wounds, and hunt for opportunities elsewhere.
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