Earlier this month, I attended the Berkshire Hathaway (NYSE: BRK.A ) and Wesco (AMEX: WSC ) annual meetings (you can read my columns in my archive). Hearing once again the timeless principles that have made Warren Buffett and Charlie Munger the most successful investors of all time led me to reexamine each holding in my portfolio, asking myself the following questions:
1) Do I really understand this company, its competitors, and the industry?
2) Am I confident that my variant perception is correct? (For more on variant perceptions, see my column, Go Against the Grain.)
3) Is the stock really cheap?
If the answer to any of these questions is anything but a resounding yes, then my bias is to sell it, especially since I think that the market is currently offering attractive exit prices. As a result of this analysis, I sold a few of my stocks recently. Allow me tell you about two of them.
E*Trade (NYSE:ET) always made me a little nervous. I spent countless hours studying the business, listening to conference calls, attending analyst presentations, and so forth, but it is a complex emerging company and it is hard to know with much certainty what it will look like in three to five years.
I was willing to live with a bit of nervousness and uncertainty when its stock was ridiculously cheap, as it was when I recommended it last September, but not at recent prices (I recommended E*Trade at $4.30; since then it's up 52% to close yesterday at $6.52). I expect that the company and stock will continue to do well, so I'm prepared to endure the value investor's lament -- "Drat! I sold too early!" -- but there's no room in my portfolio for a stock that makes me nervous and is not screaming cheap.
Barnes & Noble
I recently sold my stock in Barnes & Noble (NYSE:BKS), which reported earnings yesterday, because I became very concerned about the relatively new threat posed by used books, primarily sold by Half.com (owned by eBay (Nasdaq: EBAY ) ) and, to a much lesser extent, Amazon.com (Nasdaq: AMZN ) . (My concerns also apply to Borders Group (NYSE: BGP ) , which I recommended in February -- it's up 8% since then.)
I discovered Half.com in January and since then have used it to sell 12 books (I still have 15 books listed on Half.com, waiting for a buyer) and buy 11 books. I have found it remarkably easy to buy and sell books, and my usage has skyrocketed: I bought one book in the first two months of this year and 10 in the past two and a half months. I also just bought a used book on Amazon.com for the first time last week.
I'd always been aware of used book sales, but had always assumed that this posed no threat to the sale of new releases. But last week, I went to the New York Times book review section and looked up 10 books that were reviewed most recently (all are hardback recent releases), and then checked to see prices and availability on Half.com vs. Amazon new, Amazon used, and Barnes & Noble.com. To my amazement, Half.com had 9 of the 10 new releases, all were available in brand new condition, and the price differences were dramatic. This chart summarizes what I found:
Book Title Half.com new AMZN new AMZN used B&N.com new A Look Over My Shoulder $17.50 $24.50 $20.99 $28.00 Oryz and Crake $13.95 $18.20 $14.49 $20.80 No Second Chance $8.75 $17.47 $10.48 $14.97 I Love You Mom! $9.00 $13.97 $9.97 $11.97 The Romantic $9.24 $16.80 $11.50 $19.20 The Quality of Life Report $9.75 $17.47 $15.45 $19.96 Gulag $24.15 $24.50 $30.00 $28.00 Persepolis $10.99 $12.57 $11.72 $14.36 The Dust of Empire $13.93 $18.20 $18.15 $20.80 AVERAGE $13.03 $18.19 $15.86 $19.78 Shipping $3.25 $3.99 $3.49 $3.99 AVERAGE WITH SHIPPING $16.28 $22.18 $19.35 $23.77Premium to Half.com 36% 19% 46%
Notes: Prices as of last week. B&N.com delivers for free, same-day in Manhattan (but charges tax). Shipping is free at Amazon for new book orders above $25.
Look at the incredible savings on Half.com (and these are new, unread books)! People are clearly willing to sell used books at a huge discount, and I have to believe that American consumers will wake up to how quick, cheap, and easy it is to buy used books online. It may take a while, but indications from eBay and Amazon are that used book sales are soaring.
Of course, there will always be buyers who like browsing the bookshelves or sitting in a comfortable chair enjoying coffee and reading in a bookstore. But Barnes & Noble is serving a far larger market -- one that could be decimated over time by used book sales over the Internet (which would of course decimate Barnes & Noble and its stock).
I think Barnes & Noble's stock could do well over the next year or two, especially if the economy picks up, but I don't want to own the stock of a company that I fear is in long-term decline in the hopes of a short-term pop in the stock price unless it's managed as a long-term declining business (the leading check printer, Deluxe (NYSE: DLX ) , is a great example), paying out huge dividends and buying back a mountain of stock.
Since the fighting in Iraq stopped, stocks have soared on a post-war, feel-good rally, which is precisely what I expected. Yet today, our economy is no better off -- in fact, it's probably worse off due to the substantial cost of rebuilding Iraq without any meaningful assistance. An article in TheWall Street Journal earlier this week sums up many of the problems that concern me:
The current economic and financial climate still has some nasty flaws. Savings rates remain low, corporate balance sheets aren't as solid as they should be and debt levels remain high both at companies and among individuals.
The housing boom that has sustained the economy seems to be topping out, and business investment, which was supposed to take its place, isn't picking up. With factories operating at their lowest rates in 20 years and with huge amounts of unused production capacity remaining, businesses see little need to spend huge amounts on new equipment. And businesses still aren't hiring.
Stock prices are high compared even with expected future earnings, leaving relatively little room for more sharp gains.
Despite the many grave economic and geopolitical issues our country faces, stocks have now rallied to the point that I believe they are once again fully (if not over-) valued. Since I try to avoid making market forecasts, I'll bite my tongue and simply say: I think that it is an excellent time to review your portfolio, asking the three questions listed above.
Whitney Tilson is a long-time guest columnist for The Motley Fool. He did not own shares of the companies mentioned in this article at press time, though positions may change at any time. Under no circumstances does this information represent a recommendation to buy, sell, or hold any security. Mr. Tilson appreciates your feedback on the Fool on the Hill discussion board or at Tilson@Tilsonfunds.com. The Motley Fool is investors writing for investors.