Wednesday, November 9, 2016

Recent Sell – Magna International

Another sale from my portfolio. Regular readers may be aware that I have been liquidating a lot of my portfolio as this market enters the nosebleed section. Valuations are at all-time highs and the world of finance looks just as dangerous as last decade, if not worse. I am of the opinion that holding large positions of cash going into the next crisis is a better strategy than trying to stay invested and trying to squeeze out an extra 1% or 2% in dividends or capital gains.


I sold 50 shares in Magna International Inc (MG.TO) @ C$57.00 and closed my position.

Recent Sell Decision

  • I have been selling for a variety of reasons — including market valuations, herd mentality from other investors, simplicity focus I desire and SWAN reasons. I have detailed all these thoughts in this post.
  • There is much wrong with the economy and the auto sector is stretched (see data here). Auto sales have peaked and consumers are tapped out with massive subprime loans on the books. In addition, consumers keep buying with longer loans that they can barely afford. Auto sector is probably right up there as a cause for concern with the US student loan debacle.
  • More importantly, this particular stock has been a dog in my portfolio. I spent a lot of time over a period of months pouring over the financials, analyst takes, everything seemed good — a little too good. For the life of me, I couldn’t figure out the bear case except broad economic conditions which apply to all companies. It appeared that this was a severely undervalued company that was bound to rise. Finally I was able to figure why it was languishing. The company has invented its own way of reporting earnings. We all know that most companies these days are reporting fake earnings by discarding GAAP measures by simply calling them “adjusted earnings”. The non-GAAP numbers are OK for one-time measures where companies would use large amounts of cash for M&A activity or some other form of investment, which skew the numbers during one quarterly report. But as a sign of the times, most companies these days have resorted to this measure every quarter and started massaging these numbers in order to appear stronger than they are financially. Magna International takes it one step further by also massaging the EBITDA and using an adjusted EBIT instead. The following article from The Globe And Mail summarizes the issue.
globemail-mga
  • My rule # 1 is to understand what I am investing in. While I understand the business itself and really like it, its the accounting and financial aspect of the company that I do not completely understand. With my limited knowledge, this simply stinks of shady practice to me. Perhaps its not. But when a company discards standard accounting practices and invents its own methods, thats a huge red flag for me.
  • I have no patience for this as I try to evaluate business profitability. I have been fortunate that I haven’t been burnt already by holding this stock. Good riddance from my portfolio holdings.
Overall loss (including dividends during holding period of approx 2 years): -1.94%

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