What to do with my Losers?

We've all had them, stocks that just can't seem to catch a break. The analysts may even rate them well, their businesses balance sheets may look strong, the economy may even be favorable, but for whatever reason, they just keep going down. Well, firstly I will say that if you really really believe in the company, you have done your research and you are diversified across your portfolio, then maybe you should buy more. Warren Buffett has always been a proponent of inefficient markets, and as he says, 'Mr. Market' can often create opportunities whereby a companies stock price is selling for below its intrinsic value. A stocks intrinsic value can be seen as a companies true value and it can be calculated in a part by finding the net present value of future cash flows of a business. Net Present Value (NPV) is the present value of cash inflows and outflows over a period of time. In Microsoft Excel there is a function that you can use to calculate it. A positive NPV is good, a negative one means that you should stay away.

A stocks Intrinsic Value is a more complicated formula to calculate. It can basically be seen as the objectionable value of a stock. A popular method is the dividend discount method, which can be calculated by dividing the expected dividend per share by the cost of capital equity (per share) and the dividend growth rate. The most common way of finding Intrinsic Value is the discounted cash flow analysis. This method includes free cash flows and excludes non-cash expenses such as depreciation. After finding fair value for a stock, an analyst (or stock holder) can find whether or not a stock is trading below or above or below it. If the business is not growing its cash flows at a clip at least above the current discount rate, then it should probably be sold. Remember that we should not be concerned with where a stock has been, we should only care about where it is going. Case in point for me is Sky Television, with which I am currently sitting on a massive paper loss. If I consider that the current discount rate is 5%, (which is what you would be receiving in your cash account with Interactive Brokers, Hatch or Sharesies) then I should expect to get a return above 5% on my Sky shares. Despite sitting on a huge loss, I actually think that I will get this in future, as their cash flows appear secure and they currently offer a 5% net yield. Sky is a classic case of a stock that is so bad it is good.

Another case in point for me is Scales. Their apple orchids in Hawkes Bay got hit last year by the cyclone, as did their logistics business due to some infrastructure getting damaged. Their global proteins division, which includes the pet-food manufacturer Meteor, was unaffected by the cyclone. The global proteins division is a small component to the revenue total. It is expected by most analysts that there is upside because of a revision to more normal growing conditions along with lower freight costs. It has a net yield of around 3.5%, and combined with the (expected) rise in the share price this year, the return should be above our discount rate of 5%. Looking at the share price over the long term, Scales does not produce great returns for the common shareholder, so I may sell them if the share price were to rise above $4 (it is currently sitting at $3.33). The other loser I will discuss here is Manawa Energy, a pure electricity generator with hydro assets in the South Island, such as Lake Coleridge. They also recently acquired approval to construct a wind farm near Taihape. I brought them years on ago on the assumption that electricity prices would continue to rise. An increase in rainfall volumes and higher infrastructure costs have led to their poor performance. I think similar to Scales, their share price will increase over the next year. They have a 4% net yield and decent dividend growth potential, so I might hold them for a few more years.

So in the analyses I have done here, something I have mentioned a few times is comparing the expected share price gain and net dividend yield with the current treasury bond rate of an est. 5%. This is what you would receive in your un-invested funds with Hatch or Sharesies. With the high inflation and interest rates we are currently seeing, 5% is a historically high discount rate. But thinking of that 5% as a general benchmark to measure stock performance against, another way to beat it is to just hold some broad stock market ETFs like the TWF or USF, and earn (an average) 8% over the long term. This realization is why I am planning on doing some selling. The best results in the market are more often than not found by doing very little, rather than by doing a lot. And in the future I will be moving more funds to securities that I can safely hold for decades.