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Investors shouldn’t be afraid to swing for the fences once in a while

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR


Wednesday January 15, 2020

Our last column of 2019 was about Pengrowth Energy and how it was a lump of coal in Benj’s stocking. He bought at C$4.16 and sold on the takeover at a nickel a share. That is how you postpone retirement!

Back in the fall of 2011, we wrote about Bank of America, then trading at $6.40 (all figures US unless otherwise indicated). When we bought, the company was losing bags of money and government officials were threatening to break it up. The quarterly dividend had been slashed to a penny.

A hefty US$8.5 billion — with a B — was paid to settle fines arising from the subprime mortgage fiasco. There was talk of the bank filing under Chapter 11, but there was consideration that it was in the “too big to fail” category.

Given all this “delightful” news, we plunged in at $6.76 and set an Initial Sell Target of $38.74. Seems logical, non?

A major driver of our belief in the company was our confidence in chairman and CEO Brian Moynihan. He had a stellar career, and his bulldoggish qualities seemed to be what the bank needed to navigate the treacherous waters.

Of course, this institution had been a leader in its field for eons, and the fact that it is the Bank of America, seemingly America’s bank, made it, in our minds, less likely to go bust. That would have been a huge blow to the American ego.

Besides the capital appreciation potential, it seemed apparent that, in the event of a recovery, the dividend would pop. There have It has, five times, to the current 18 cents per quarter. Still more upside is expected. Quarterly revenue reported this week was US$22.35 billion, down from a year ago, but ahead of analysts’ estimates. Earnings came in at 74 cents a share, up from 70. The book value grew a strong 9 percent to US$27.32.

We sold 28.5 percent of our position at $33.75 in December, for a 399 percent gain. It is not our normal strategy to sell winners at the end of the year; if we wait, it means tax deferral is our friend. But the stock had swollen to a lofty 16.5 percent of the portfolio.

Combined with First United and First US Bancshares, American banks comprised about 38 percent of our portfolio of 20 securities. Diversification was the primary consideration here. In addition, our belief that a recession is in the cards before the end of 2021 suggested that trimming our holdings made sense.

Another unusual quality of this sale: it was below our Initial Sell Target, which we still consider to be eminently reachable — it is far below the $53-plus where it traded prior to the 2008 collapse.

Our current strategy is to buy less and sell more. Ultimately, in the two portfolios we manage, only one purchase was made in 2019. That likely left some of our subscribers looking for more action.

But with 20 holdings in the portfolio that Benj manages and 21 in Ben and Phil’s, we have no shortage of pieces on the board. The 2008 recession, when investors were running like scared rabbits, was a prime time to buy, because a recovery is always a certainty. The question, of course, was when it would happen, something that can only be known in retrospect.

Everyone who invests in stocks for several years will have losers. If we count Pengrowth at a 100 percent loss — not quite the case, but close enough, even with dividends — it is necessary for other positions to counterbalance. Colossal gains like the one obtained through BAC offset many errors.

That is why we virtually always swing for the fences in the Contra portfolios and accept the nominal number of blowouts that occur. Our modus operandi is far different from that of the masses, who throw money into passive ETFs and match the markets. That is a strategy that will prove financially debilitating when stocks plunge — and they will.

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