Today we're announcing two moves that will change the complexion of our portfolio -- for now. In the next five days, we are going to sell Human Genome Sciences (Nasdaq: HGSI) before it reaches its one-year anniversary in the portfolio, and we're going to cover our short-lived short of Affymetrix (Nasdaq: AFFX). It is our intention to put the proceeds quickly into another investment, which we will announce next week.
What? Selling HGS into the fall?
We are most definitely NOT selling Human Genome Sciences because we've lost confidence in the business or the general market. Far from it. We continue to believe that the U.S. stock market in general and HGS in particular are very attractive long-term investments. We think that it's likely that investors will look back at September 2001 as a great time to buy into both -- not as a matter of patriotism, but in terms of value. We said as much in Monday's column, entitled "We Won't Sell."
So why are we going exactly against what we said and selling? This is just a bit of portfolio management that we had planned before the attack, and we have not changed our course. We're doing it for tax reasons. As we said in a column last week, we stand to recover a good slice of our losses in HGS by selling it and taking a capital loss for the portfolio. We have to do this now, before Saturday, to use short-term capital gains rates. Here is the calculation:
By selling now, we will realize about $26,000 in losses. We've had two other sales this year, of Spiders (AMEX: SPY) and a portion of Amazon.com (Nasdaq: AMZN). The short-term loss in HGS, together with the loss from the Spiders, would have the tax effect of offsetting the $13,700 gain we realized in Amazon, negating the $2,700 tax we owe on it. We'll take the remaining $12,300 as a short-term capital loss, knocking another $4,750 off our tax bill. (This portfolio, like mutual funds, calculates its taxes without consideration of the $3,000 capital loss limit per year that the IRS imposes on you and us. In our cases, we would have to carry the remaining loss forward into next year.)
Selling now, then, effectively recovers about $7,500 for the portfolio, which is around 40% of the current value of our HGS holding. It's as though the stock bounced 40% in one day. After the 30-day wash sale period passes, we plan to reinvest in HGS, if things have not changed significantly. We remain bullish on its long-term prospects, and its valuation is much more attractive than it has been in a long time. We would not be surprised at all if the stock will have gone up by the time we can buy it back, but as long as it's not up more than 40% 30 days from now, we've benefited. That is the calculated risk we have decided to take.
If you've got losses in your portfolio -- and you probably do, if you hold stocks -- then you too may want to consider a tax-loss sale. Poke around our tax area and see if it's right for you. If you don't feel that you understand the issues well enough, you may want to discuss your situation with a financial planner, like those offered through TMF Money Advisor.
In sum, we are selling HGS not on principle, but on a technicality. We saw that we would need to make this move to save some money, so we are going to do it. We're not going to dawdle now. We plan to re-enter the market, in which we have not lost faith, as soon as practicable within our self-imposed restrictions. We also plan to re-enter HGS when we can, when tax-law restrictions allow. Furthermore, we are hardly even net sellers in the market, because at the same time as we are selling HGS, we will be...
We shorted Affymetrix, maker of biochips and related DNA analysis products, this June. The results? If we had covered our short position near today's close, we would have about a 29% profit, minus the cost of borrowing the money for three months. We're happy to take that gain in such a short period.
To summarize our reasoning for the short, we believed that the company faced a closed business situation. Its customer universe was limited both in number and cash to spend, its main products were not must-haves, and we didn't see an expanding market for those products. That thesis hasn't changed. In fact, we still think time will prove it correct.
So why cover? For a reason you hear from us repeatedly as a reason to sell (or, because this is a short, buy. Confused? Check out our special on shorting): Because we think we have better places for our money. When we balance the possible gains for staying short Affymetrix against making other investments at this time -- long or short -- we think we have some better places for our money.
Some stocks we have been eyeing for quite some time are looking very attractive right now. We think their businesses prospects haven't changed; in fact, some of them are doing even better. We're not predicting a bottom for the market -- we make our investment decisions about individual businesses, not some creature known as The Market (of which Binkley in Bloom County would surely have been a-feared of late) -- but we do think that the time has come to buy our favorite companies. We also think there are other businesses that meet our criteria for shorting and could provide larger rewards than Affymetrix. We're looking to take another short position soon.
A closing word on Affy: Yes, we've been lucky as well as right. We had about a 14% gain before the markets closed for a week, and that was after some anxious days when the stock price exceeded our short price by quite a bit, too. The last several days have provided more gain, and we are not unmindful of the combination of a worsening economy and the devastating events of last week -- as you can see by what we've been writing on the site for over a week. The bottom line, though, is that we've realized a very good gain from Affymetrix's fall.
Short positions, however, return less for each additional percentage point the stock falls. Rather than wait longer for smaller incremental gains, we're going to take these profits and reinvest them in another stock (long and/or short, as we think it makes sense) that we think has better prospects.
We'll discuss those prospects in the coming days.
The members of the Breaker Team like a good round of gaming. None has a position in any of the stocks mentioned -- except for David Gardner, who owns the portfolio, after all. The Motley Fool is investors writing for investors.