Thursday, May 14, 1998
by Mark Weaver (MWEAV)
St. Louis, MO (May 14, 1998) - The markets moved fractionally lower today while the Borefolio bucked the trend and moved fractionally higher. On the day the Borefolio rose 0.16% while the S&P 500 was down 0.13% and the Nasdaq slipped a mere 0.04%. The Borefolio had only 2 gainers and 4 losers at the end of trading, but Borders Group, our largest holding, was also our largest gainer, making for the positive day.
Some of you may have noticed that my address has changed. I am moving from St. Louis to Springfield, IL. (This is another step in the "simplify my life" plan which is a story left for another time). Over the past month I have been commuting the 90 miles with great regularity as I wait for my kids to finish school so that I can complete my move.
Applying the principles espoused by Peter Lynch I have been looking for investing ideas along the way, and I have come up with at least one -- the trucking industry. What a boom time these guys are enjoying. I have never seen so many 18 wheelers good buddy!! It is Smokey and the Bandit in spades!!
The trucking industry has benefited mightily from the decline in oil prices and from the rail gridlock resulting from the Union Pacific (NYSE: UP) merger. Top it off with a decent economy and you have a bonanza for truckers. While this euphoric scenario has its appeal, the risks of a trucking investment are that oil prices might rise again, the railroads will finally get their act together and the economy may slow. Point-counterpoint, Ying-Yang, Plus-Minus... it's what makes the investing world go around.
Lets face it, trucks are boring... very boring. So, I decided to get out my Morningstar Stock Tools and see what's up in the trucking business. I have not researched any of the companies I will mention in-depth so, none of my comments on the industry should be construed as a buy or sell recommendation.
I decided to screen the trucking industry (52 companies in the database) for the following characteristics: return on equity > 14%, earnings growth over the past three years > 20%, revenue growth over the past three years of >20%, and a forward PE Smithway Motor Express (Nasdaq: SMXC).
Smithway is a small cap trucking company (market cap $83 million). The company hauls truck-sized loads for companies like York International, GE and LTV Steel. Revenues have doubled over the past four years and earnings, which were zero in 1994, are now $1.17 per share on a trailing basis. Dramatic growth to say the least. If there is a negative for Smithway, it has to be leverage. The company carries an above average debt load which would increase the risk. Overall though, the company looks to be worth a look and yes, I've seen some Smithway Trucks out on the road -- they definitely are still busy.
A couple of trucking firms that didn't pass the screen but I still like are Heartland Express (Nasdaq: HTLD) and Werner Enterprises (Nasdaq: WERN). Both of these companies have performed well and have virtually no debt. Rush Enterprises (Nasdaq: RUSH) sells and services Peterbilt trucks which makes it an interesting play on the trucking business as well.
I received several kind comments after last week's column addressing a Boring selling strategy. I was a bit surprised that no one noticed that I only addressed the easier half of the selling equation -- selling winners. When to sell a losing stock, that is where the angst of selling really lies. Do you sell a losing stock and risk the pain of watching that stock climb again (as happened, for example, with Green Tree Financial (NYSE: GNT))? Or, to you hold the falling stock and wait for some real pain (Iomega (NYSE: IOM) comes immediately to mind)? How are decisions made to sell losers, is there a Boring way to sell losers?
While I have a hard time setting fast and hard rules in this area there are certainly principles which can make the decision easier. The first step in the process begins with a good buying rationale in the first place. Anytime I buy a stock I note the reasoning behind the purchase. For example, I may like management, I might be excited about a product line, or perhaps it is the growth history or the fact that the stock looks under-appreciated. If there aren't identifiable reasons to buy or hold a stock -- well, selling just got a whole lot easier.
One good reason to sell is when the reasons you bought the stock no longer exist. A good example in the Borefolio was Tidewater (NYSE: TDW). Much of the rationale for owning Tidewater rested on the supply/demand equation for oil. Adequate oil prices meant bigger drilling budgets and more business for Tidewater. As oil prices sank, so did Tidewater's stock. One of the fundamental reasons for owning the stock was no longer present. That was a good reason to sell. It doesn't matter that the stock rose after it was sold, the discipline of selling when the story changes will pay off more often than not.
Another good reason to sell is an unanticipated change in the company's business, management or competitive pressures. The loss of a CEO can signal trouble. I often reflect on the fact that Steven Wiggins resigned as CEO of Oxford Health Plans (Nasdaq: OXHP) a couple of months before the bottom fell out. The fact that he stepped down when things weren't running smoothly should have been a clear signal to reevaluate the stock.
Nike (NYSE: NKE) is another stock that is wallowing because of changes in shoe trends among the young as well as due to unfair labor accusations that plague the company. Nike may rise again, but the recent lackluster performance of the stock probably could have been anticipated.
In the book It's When You Sell That Counts, Donald Cassidy states that if an investor wouldn't buy the stock at its current quote, the stock should be sold. In essence, I think that idea has a lot of merit if judiciously applied. Every investor should have a set of criteria they are looking for when buying -- be it momentum for a momentum investor, a low PE for a value investor, and on and on. If I want rising margins and margins are falling consistently -- SELL. If I want expanding market share and market share is shrinking -- SELL. If the criteria I look for when buying a stock aren't there, I sell the stock.
Finally, the most controversial reason for selling a loser is because... it's a loser. Lets say that a stock collapses on earnings news. A re-evaluation of the stock at the new, lower, price shows that it is now "undervalued." A decision is made to hold on. Is that a good move? I would submit that... it depends. Current Boring holding, Andrew (Nasdaq: ANDW), is a case in point. Although the company disappointed investors in the last quarterly report, the basic industry trends remain intact. We are holding.
That said, research would indicate that following an earnings disappointment most stocks trade lower six months later. An earnings disappointment should put a stock on the "to be thoroughly evaluated" list. A careful look for cracks in the armor is warranted any time a company misses the mark.
One important point that I have found to be helpful in avoiding disaster is to ignore PEG and YPEG analysis of stocks that have missed estimates. By definition the analysts who are making the estimates on which the PEG and YPEG are based haven't been making the grade. Why would they be correct in the future if they have blown it in the past?
So, I'll summarize my thoughts on "losers." I am a seller if the basic reason for buying the stock is no longer operative. I am a seller if there is a fundamental change in the stock's prospects. I am a potential seller if I wouldn't want to buy the stock at the present price. I would also considering selling if the company misses estimates.
On a final note, you may want to take a look at Greg's review of the Borders conference call -- it will be worth your time.
Stock Change Bid ANDW - 1/4 22.31 CGO - 1/2 36.00 BGP + 11/16 32.56 CSL + 5/16 51.50 CSCO --- 76.00 FCH - 1/8 35.19 PNR - 13/16 44.94
Day Month Year History BORING +0.16% 1.01% 4.21% 31.13% S&P: -0.13% 0.50% 15.14% 79.75% NASDAQ: -0.04% -0.16% 18.79% 79.20% Rec'd # Security In At Now Change 2/28/96 400 Borders Gr 11.26 32.56 189.28% 6/26/96 150 Cisco Syst 35.93 76.00 111.50% 8/13/96 200 Carlisle C 26.32 51.50 95.63% 3/5/97 150 Atlas Air 23.06 36.00 56.13% 4/14/98 100 Pentair 43.74 44.94 2.73% 11/6/97 200 FelCor Sui 37.59 35.19 -6.39% 1/21/98 200 Andrew Cor 26.09 22.31 -14.48% Rec'd # Security In At Value Change 2/28/96 400 Borders Gr 4502.49 13025.00 $8522.51 6/26/96 150 Cisco Syst 5389.99 11400.00 $6010.01 8/13/96 200 Carlisle C 5264.99 10300.00 $5035.01 3/5/97 150 Atlas Air 3458.74 5400.00 $1941.26 4/14/98 100 Pentair 4374.25 4493.75 $119.50 11/6/97 200 FelCor Sui 7518.00 7037.50 -$480.50 1/21/98 200 Andrew Cor 5218.00 4462.50 -$755.50 CASH $9447.76 TOTAL $65566.51