At the Fool, we generally advocate a buy-and-hold style of investing, but that doesn't mean you should just blindly hang on to all of your investments forever. Sometimes there can be a good reason to get out – especially if your original reasoning for buying the stock no longer applies. Here are two stocks our analysts own in their personal portfolios that they are tempted to get rid of, and one that they've already sold.
Brian Stoffel: For those who are unfamiliar, PriceSmart (NASDAQ:PSMT) is quite literally the "Costco of Latin America." PriceSmart was spun out of Costco, and runs its business in a very similar manner. In fact, I'm a big fan of PriceSmart, as my family and I spend half of our year in Costa Rica and enjoy having the wholesaler there to meet our needs when necessary.
So why, after owning the stock for more than three years, did I recently sell it? It all comes down to valuation.
PriceSmart saw its stock more than triple over the past five years. Some of that has to do with expanded earnings and a rising market. But the outperformance can really be traced to a high P/E multiple afforded the company. That's largely because investors are rightly excited about PriceSmart's foray into mainland South America via its burgeoning operations in Colombia.
Here's the problem: at today's prices, PriceSmart trades for 29 times earnings, and 87 times free cash flow. Those are lofty valuations. If PriceSmart were opening two or three new warehouses per quarter, or if same-store sales were growing by more than 5% every quarter, that would be understandable.
But PriceSmart currently has just 36 locations total, worldwide. And same store sales over the last nine months have advanced just 2.6%. That just isn't fast enough to warrant such a valuation, and that's why I sold my shares.
Selena Maranjian: I had high hopes for my shares of Seadrill (NYSE:SDRL) when I bought them, but I'm now sitting on a 78% loss. I bought into the deepwater drilling specialist knowing that it was carrying a lot of debt, but optimistic about its prospects as it had a lot of rigs under construction and its fleet is younger than those of its peers. I also liked its fat dividend, which yielded close to 10% not so long ago.
Well, times have changed. Its last dividend was paid about a year ago, so that income has dried up. The offshore drilling business, once so attractive, is less so these days, given the low price of oil and the high cost of the drilling. The company is still carrying a lot of debt (close to $10 billion worth, recently) and is also on the hook for billions of dollars in payments toward the construction of more than a dozen new rigs, while its fleet is not fully contracted – in part due to a general oversupply of rigs. In other words, a lot of money is going out, and not enough is coming in. Its free cash flow has been negative over the past few years.
Another worry is that it generates its revenue from just a few major customers, and its biggest one is Petrobras, Brazil's scandal-ridden and not-so-stable oil company.
Is there any good news or cause for hope? Well, sure. The company cancelled one construction order recently, saving it money, and the offshore and deepwater drilling markets could turn around sooner than expected. But there are plenty of companies with futures you can be more certain about, so only those with a high risk tolerance should consider hanging on to these shares.
Matt Frankel: Like Selena, I've also gotten burned by a drilling stock. I purchased shares of Transocean (NYSE:RIG) for $37.73 a little over a year ago after the stock had already declined more than 30% from its peak, thinking I had made a great decision. After all, the company had the largest ultra-deepwater drilling fleet in the world, paid a dividend yield of nearly 8% at the time, and had a massive backlog of business. Plus, the company was a favorite of activist investor Carl Icahn, who remains a major shareholder.
After oil prices collapsed, my reasons for investing in Transocean started to fly out the window. The company cut its dividend, and has since decided to suspend payments for the rest of 2015. The backlog has fallen from $21.2 billion to $18.6 billion so far in 2015, and the majority of its deepwater and ultra-deepwater rigs are uncommitted for 2016 and 2017. Now, shares are trading for less than $16 and I'm sitting on a 63% loss.
The only reason I haven't sold my shares yet is that the company looks like it's too cheap, even for the oil market's condition. Transocean has a nice stockpile of cash it could use to help ride out the tough times, and shares are trading for just 43% of their tangible book value. In other words, Transocean could theoretically shut its doors today and sell its assets, and investors would receive more than $36 per share.
So, while I'm emotionally ready to sell this losing investment and move on, the fundamentals are telling me to hang on (for now).
Brian Stoffel has no position in any stocks mentioned. Matthew Frankel owns shares of Transocean. Selena Maranjian owns shares of Costco Wholesale and Seadrill. The Motley Fool owns and recommends Costco Wholesale. The Motley Fool recommends PriceSmart and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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