Market continues to be brutal for stocks across the board, leading to our decision today to "high-grade" our portfolio by exiting a poorly-run, less-convicted name and allocating the capital towards better-run, strongly-convicted name(s).

Let’s dig in on what “high-grade” means. We’re talking about cutting pain from a stock that is not right in this environment (in this case, stocks with high price-to-earnings multiple, too much economic sensitivity and no capital returns), use the cash to buy more of high-quality company that fit this environment (in this case, make real products for a profit, return cash to shareholders through dividends and buybacks, and trades at a reasonable valuation).

In an effort to "high-grade" our portfolio, we are selling shares of Boeing entirely. We will allocate the capital towards other names in the portfolio.

It's tough to part with Boeing at these prices, especially since our cost basis fall in the 200$ (nearly 50% loss). Admittedly, we were wrong on the name to start with, and were too stubborn to be more disciplined when the company couldn't execute. We will provide a more detailed analysis of what we did wrong in this name later on, so keep an eye out for that. 

However, we believe that in investing, we don't have to make money back the way we lost it. Let's put it this way: for our Boeing position to become break-even, the stock needs to go back to our cost basis of ~200 (~70% upside from here). We just don't see that happening in this environment. Our investment thesis is predicated on the strong travel demand and therefore strong demand for planes. However, there are concerns about the economy going into a recession now, therefore the travel demand is expected to peak and decline soon, especially with higher costs (inflation). Second, while the strong demand for plane is real and Boeing as a company is rightly positioned in the plane market, management has been terrible. They have not been able to execute, failed to deliver on important issues related to the 787 and 737 Max. 

Again, we’re taking a little bit of pain on a small position that we haven’t liked for months — Boeing — and using the cash to bulk-up other stocks that we like that can work in this market environment. At the moment, we are thinking to put the capital in the following groups. The economic-sensitive names that have been hit as much as Boeing but more well-run management-wise include Disney, Ford, Morgan Stanley, Wells Fargo. The less-economic sensitive names that recently reported great quarters but underappraciated by the market include Google, AMD, Facebook. Do not forget the defensive healthcare names including Eli Lilly, Pfizer, Danaher, Humana. Lastly, energy/oil companies are providing us with great dividend yields and buybacks.

Remember, in this recent bout of market selling on concerns about whether the Federal Reserve’s gradual approach to hiking interest rates will be enough get inflation under control, stocks with high price-to-earnings multiple, too much economic sensitivity and no capital returns are getting punished. However, shares in companies with low multiples, make stuff at a profit, pay dividends or buybacks or both, and whose businesses can withstand an economic downturn are the ones we think will be able to weather this current storm.