Thursday, 20th Jan 2022 Portfolio Actions: Applauding Our Decision To Trim Ford (F), Adding to Morgan Stanley (MS), Cutting Loss in Skyworks (SWKS), Initiating Costco (COST)
Thursday, 20 Jan 2022 8:00 AM EST
By Mike Le
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Volatility in the stock market continues for the third week of 2022, with the S&P 500 on track for a third weekly decline. This comes amid the following factors:
i) A very fast-paced increase in the 10-Year Treasury Yield, now at levels pre-pandemic (~1.9%). Higher yields produces a greater discouting effect when calculating discounted cash flow models, since it is in the denominator of the calculation.
ii) Also, investors are pricing in as much as 4 x 0.5% rate hikes in 2022, as the Federal Reserve shifts towards combatting inflation.
iii) Even worse, investors are weighing the prospect of Quantitative Tightening (the Federal Reserve reducing the size of its balance sheet).
Point i) is not as worrisome, because we've been higher on the yields before, and the economy/ stocks did well during those times. Higher yields are actually indications of a good economy (during Covid, 10-Y yield was near 0). What's most worrisome to the market is the combination of points ii) and iii). Market is worried that the Federal Reserve may tighten too quickly, slowing down the economy, and that will surely kill the current bull market in stocks.
In these uncertain times, here are the following principles that we'd like to follow:
i) Let the market do its work. Don't try to call a bottom. If you have been following us long enough, you would know to have sold winners at the high, have a good cash position on hand in preparation for this period (we were going into 2022 with 22% cash, now 12%). Also, you would be buying in increments, so that when there's more downside you can always buy more.
ii) Look for reasonable valuation, either be through valuation multiples or discounted cash flow models or any other models out there, as long as there's a sound reasoning. For example, let's say Ford had been trading at 13x forward P/E multiple, and we've said before that we're comfortable with a 10x, so when Ford trades down to 10x forward multiple we would like to buy some, and also be prepared to buy more if it gets to 8x.
That leads us to some of the portfolio actions we've recently taken and would like to discuss with you today.
Applauding Our Decision To Trim Ford (F)
Yesterday, Ford shares declined ~7%, back to $22/share level from $25/share. While it is possible the decline could be attributed to the recall of 200,000 cars due to brake light issue, we believe it was profit-taking that triggered the sell-off. Ford had gone up from $22 -> $25 to start the year, and much more if you look back at last year, therefore it is prudent that funds take profits. We certainly have done so, as we wrote about it here. We think the sell-off in Ford may just be starting, as a result, we are going to wait until there's good enough reasons to buy more shares. Ford is still the biggest position in our portfolio, at 12%, cost basis of $14/share, so we don't want to trade around this position too much as it would violate our low cost basis. We will certainly communicate with you when it's the right time to buy. Ford will report earnings on Thursday, February 3rd after the bell.
Adding to Morgan Stanley (MS)
We recently added to our Morgan Stanley position, now weighting ~10% of our portfolio. They reported a stellar quarter on Wednesday morning, and it is very surprising that the stock is not back above $100/share already. We were willing to go overweight on this position (10% versus 8% allocated) because of two reasons: i) shares are back at 200-day Moving Average, a big support area and ii) we are underweight on the other financial name - Wells Fargo - by 3% so it's ok if we're overweight Morgan Stanley by 2%; they take care of each other. We would likely sell some of what we bought to bring the position back to equal weight when shares get above to the previous high of ~105$/share. We believe shares will go there, you have to read the quarter results (we will send out soon), it was incredible!
Cutting Loss in Skyworks Solutions (SWKS)
~9% loss in a name that we're not too convicted in, therefore we're out.
Initiating Costco (COST)
The capital re-gained from getting out of SWKS allowed us to initiate a position in Costco (COST), a best-of-breed consumer defensive name (similar to Walmart). We're initiating a position in Costco at an average cost basis of $494.5/share, initially 1.7% of our portfolio but we'd like to work it to 3.5%. We will be out with a detailed initiation post in the coming days. Remember, consumer defensive names are preferred when there are worries about economic slowdowns, like what we have right now. Also, Costco has been on our Watchlist and it has fallen ~15% off from all time high, making it a very good entry here. There's probably more room to the downside: if you take a look at last year, the stock was down ~20% from Jan to Mar before shooting higher and never looked back since.
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