As an analyst for The Motley Fool, I manage a real-money account for the world to see. It focuses on my specialty, banks and financials, but I also buy some non-financials.
I'll be making some more buys in financials soon, but today I want to announce two moves affecting four nonfinancial stocks:
- I'm selling Microsoft (MSFT 1.65%) and buying Apple (AAPL 0.64%).
- I'm waving the white flag on Best Buy (BBY -0.11%) and RadioShack (RSHCQ).
Before I get to the rationale of each move, let's look at the big picture. I've written in the past about one of my investing weaknesses, which is believing in the upside of poor companies that are selling for cheap. I wrote:
A key Buffett quote to understand: "Time is the friend of the wonderful company, the enemy of the mediocre." Why is this so? Partially because "you only find out who is swimming naked when the tide goes out." I really struggle to abide by this advice. I am often the Statue of Liberty when it comes to investing in inferior companies on the cheap: "Give me your tired, your poor, your huddled masses," etc.
Knowing this, I'm working to move the nonfinancials portion of my real-money stock picks to quality companies, even if the price is more dear.
Move No. 1: Selling Microsoft and buying Apple
I originally bought Microsoft in late 2011 because it continues to crank out impressive earnings and cash flows from its cash-cow operating system and office software suite. Its balance sheet is also a thing of beauty. All this is still true today.
That said, Microsoft's story is one of trying to keep what it has in the face of a mobile onslaught that its offerings are less well-positioned for.
On the other side, we have Apple, which also has amazing earnings and cash flows and an amazing balance sheet. And although it's now the biggest public company, it's still a potential growth story.
Worries about the law of big numbers, competitive threats, and margin compression have Apple trading at the high-single-digit enterprise value-to-free-cash-flow multiples Microsoft's at.
It's not necessarily a dig at Microsoft, but given similar price multiples and my goals with my real-money stock picks, I'm going with Apple over Microsoft.
Move No. 2: Selling Best Buy and RadioShack
When I first bought shares of Best Buy and RadioShack in February 2011 (I later bought some more in the Shack), I wrote this: "My thesis hinges on two things: (1) the businesses of RadioShack and Best Buy staying steady (or growing!) over the short to medium terms, and (2) the market upgrading its hatred to lukewarm thoughts sometime in the next three to five years."
Neither has been happening.
I was amazed that these two had been able to keep up impressive profitabilities throughout the financial crisis. To put their past profitability in perspective, if we used their average 2007-2009 earnings, Best Buy would currently be trading at a P/E ratio of less than four. RadioShack would be at a P/E ratio of around one!
Unfortunately for my thesis, both have slid into unprofitability, losing money in their last quarters. We've seen RadioShack's smaller, mobile-focused stores lose gross margin power, from 47.3% in 2007 to 36.2% for the trailing 12 months. And we've seen Best Buy, whose margins have been lower but steady in the mid-20s, looking to copy the Shack's flagging smaller-store model.
With a possible take-private bid from Best Buy founder Richard Schulze now delayed till after holiday results are in, there's a couple more months for Best Buy's weak execution to lower the bid. Speculation for the takeout bid has already fallen from the mid-20s per share to the mid-teens.
It's time to end my mistakes on both Best Buy and RadioShack. Holding on to them further would simply be speculation on my part.
You can follow all the moves in my real-money account here.
