I have done some spring cleaning of my portfolio recently, clearing out some of the older positions in my portfolio. After a position has been in my portfolio for close to 1 year, I do a check on my original investment thesis. For the stocks in which I have lost confidence in my original theses, I try to liquidate before the 1 year mark to take advantage of the short-term capital losses. For the stocks which I think are fully valued, I try to liquidate shortly after the 1 year mark to take advantage of long-term capital gains.
First up on the chopping block is RLOG, a long term position which was initiated more than a year ago. RLOG is a shipping company operating on the Great Lakes, shipping bulk goods for US and Canadian companies. This is a mature market that is protected by shipping laws in both Canada and the US, which restrict domestic shipping to vessels flagged in the US and Canada and operated by crewmen from those countries. As a result, excess vessel capacity in the much larger international shipping market cannot directly compete. During the recession, RLOG stock fell to ridiculous levels that did not account for the value of the vessels owned, and I took a position around the $3-4 level. The stock stagnated at $5 for a long time, but has recently sharply appreciated to $7-8. Management then filed a secondary share offering indicating that the CEO and a major shareholder intend to sell a large block of their stock. While I think that RLOG is worth around $9-10 a share, I decided to liquidate my position since management is doing so. Furthermore, this is a mature business with limited growth prospects, and my ROI already exceeds 100% over slightly more than a year.
Two other old positions which I liquidated with short-term losses are LNET and TSYS. LNET sets up televisions in hotels and hospitals and collects revenue from them. Burdened by a huge debt load, the company nonetheless had oodles of cash flow even in a recession. LNET was in danger of violating all kinds of loan covenants, and I bought the stock thinking that the company would not actually be forced into bankruptcy, but would instead just pay a higher interest rate to cure the deficiency. Now that nearly a year has passed, cash flow is declining faster than I expected and LNET will probably take more than 5 years to clear the debt, and I decided to cut my losses at 50% before the 1 year mark. I am no longer confident that the cash flow will sustain the debt over the long term, and will chalk this one up as one of the dangers of investing in a highly leveraged stock (not that I am averse to all kinds of debt, see my TUC and ETM writeups). My second position, TSYS, is contracted by the major telecoms to route emergency services calls from mobile phones to the closest emergency responders. Flush with cash from this business, TSYS acquired a company that made GPS software for the iPhone at an outrageous price, and the stock plummeted when it became obvious that not only was the acquired software not up to snuff, but that the entire iPhone GPS software sector is highly competitive with multiple entrants. I took a position thinking that the stock market was not taking into account the core business of the company. But on review recently, I noticed that management was taking an unreasonable amount of the cash flow as stock options and compensation. I realized that I’ve missed a crucial fact during my original analysis of TSYS, and decided to liquidate with a loss of 20%.
