Wednesday, August 6, 2008

When Stocks Decline After You Buy Them

Sometimes when stocks drop after you've bought them it's because you've made a mistake: you bought stock in a troubled company (e.g., OPMR), or you bought stock in a good company at the wrong time after ignoring the relevant macro trend (e.g., BBSI), or you bought stock in a good company but at the wrong price (e.g., at a too-high multiple).

Stocks can also decline after you buy them even if you've made none of those mistakes. A recent example for me is Exxon Mobil (NYSE: XOM). When I bought Exxon, it was benefiting from the relevant macro trend (the secular bull market in energy), and it was trading at an enterprise value/forward earnings multiple of about 9x. I tend to view an EV/forward earnings multiple in the single digits as a conservative price for stock, considering that market average P/Es declined to 10 at the end of the last secular range-bound market in stocks (see graph above, via Vitaliy Katsenelson; for more info on his thesis, see this post, A Secular Range-Bound Market? Vitaliy Katsenelson's Thesis). I purchased XOM at $86.69, and today it is trading at $78.33, partly due to the recent correction in oil prices, which has put downward pressure on a lot of oil stocks (e.g., the oil royalty trust I mentioned that had hit a 52-week high of $107 per share in June, BP Prudhoe Bay, closed at $81.89 today. Fortunately, my average cost on this one is under $60 per share).

It's never fun to watch stocks drop after you buy them, but when those stocks belong to well-run, profitable companies such as Exxon1, that have good prospects, are trading at cheap valuations, and have virtually bulletproof balance sheets, I'm not fazed. I'm content to hold these sorts of stocks, and in some cases would consider adding to them. I'm a little less sanguine when more speculative stocks I own decline.

1Note that Exxon's mega cap size isn't what gives me confidence in the company. I have similar confidence in other, much smaller, companies thats stocks have declined since I bought them, e.g., Hudbay Minerals (TSX: HBM.TO), and Heidrick & Struggles2 (Nasdaq: HSII) that are also profitable, trade at cheap valuations, have virtually bulletproof balance sheets, etc.

2Heidrick & Struggles, incidentally, reported a solid second quarter today, beating consensus earnings estimates by 6 cents.


DaveinHackensack said...

Daniel Wahl wrote a somewhat related post yesterday prompted by the recent decline in POT, which was a big winner for him last year: re: Potash. I had Wahl's post in mind when I wrote this one.

Anonymous said...

Daniel sold VRS.TO, PNWIF and VRS.TO for substantial losses shortly [within weeks] after actively touting them on his own website.

He doesn't seem to have much conviction in his picks as long term holdings.

SRA Corp. is down from > $6 to $0.57 over the past year and it's just a question of how low it goes before he gives up on that one too.

Where is the insight he has always been credited with?

DaveinHackensack said...

According to Daniel, he still likes PNWIF, but wanted to concentrate his assets in positions he likes better. His choice. I was never a fan of VRS.TO (it reminded me of a forgettable company called Ionatron, as I mentioned to Daniel), and SRA looked too risky for my taste. I'm down on my zinc play too Hudbay Minerals (HBM.TO), but with Hudbay there are no solvency issues, since it has a rock-solid balance sheet. It's also profitable. Probably doesn't have the potential upside of SRA if SRA does work out, but I liked the risk reward combination better with Hudbay and I still do.

Regarding your question about his insight, I'd say his main insight (from my perspective) was to see and take advantage of the agricultural boom by investing in Potash and Hemisphere GPS. And also to avoid investing in companies such as Ruth's Chris that he knew would suffer rising costs from the agricultural boom, at the same time consumer spending was under pressure due to the credit crunch, high energy prices, negative wealth effects, etc.

ravinsu said...


Hey Stockdocks,

How come you are not posting at GF anymore? Did you stop your newspapers and subscription to valueline?

Also I just happened to lurk at your friend BillyT's website. They have some really insightful things to say about your stockpicks. Congrats!

DaveinHackensack said...


You might as well post here using your name, since folks seem to recognize you. Don't worry, I won't delete your comments or ban you.

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