The first quarter of 2024 – the first official full quarter for Middle Coast Investing as an entity – was a strong one for the stock market. Excitement over artificial intelligence as a theme and upcoming rate cuts is part of the story. We also heard a few echoes of 2021’s craziness, which is a warning sign.
Middle Coast Investing portfolios did ok but lagged the overall market. I usually lag when the market goes crazy, so that’s part of the story. But we also had a few bad decisions or moments of bad luck play out, so blame falls on me.
For our Q1 2024 portfolio review, I want to look at the quarter’s challenges through the lens of the hardest question to answer in investing: when to sell.
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Forever is a mighty long time
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
Warren Buffett, 1988 Berkshire Hathaway Shareholder Letter.
“All of us would be better investors if we just made fewer decisions.”
Daniel Kahneman, for example as quoted here.
Buying a stock is simple. You decide whether or not you want to buy a stock, and at what price you are willing to buy it. Then you buy it.
Selling a stock is trickier. Warren Buffett’s quote above is both logical and ideal. Holding forever reduces the number of decisions you have to make, as per Kahneman. It reduces taxes owed. Holding the right stocks leads to wonderful outcomes.
But people often ignore the first part of Buffett’s quotes. Outstanding businesses and outstanding managements are not easy to identify, and the ones that are easy to identify cost a lot. An outstanding business today might be less so in future years, or an outstanding management team might turn over or deteriorate. It is easy to say “I will never sell this stock” and harder to analyze which stocks deserve that treatment.
It’s hard to know when to say goodbye to a stock. Photo by Hans-Jurgen Mager on Unsplash
A Selling Framework
I find three reasons to sell a stock1:
- Buying and owning the stock is a mistake. This is the easiest scenario; admit you’re wrong, suck it up, and move on.
- The stock has reached my estimate of its fair value. But, fair value is an estimate, and needs updating; outstanding companies tend to soar past estimates over the years.
- The stock has appreciated so far past its fair value that it makes sense, no matter how good the company is and even with the tax hit, to sell the stock and reinvest the proceeds elsewhere.
Two trade-offs to selling shares are:
- Paying capital gains or (in short-term positions) income tax on sales
- After you sell it, the stock may go up a lot more than you ever expected.
Selling (or not) in Q1
Within that framework I’ve made every type of mistake. We can see that in the highlights and lowlights of our Q1 2024 portfolio review.
Dropbox (DBX) is a good business. The company sells storage services and has tried to expand into other verticals, like signatures. Because it’s a pain to reorganize one’s storage, and because Dropbox has a good balance sheet and is actually profitable, it is low-risk. As late as April 2023, I bought shares at $20/share. Low $30s was my estimate of fair value. We got to $32 in January.
As Dropbox is not outstanding, I should have sold. I sold a quarter of our shares and thought, “let’s see how one more quarter of results goes.” Those results were not great, as Dropbox saw a decline in the number of active paying users and forecast an unimpressive growth number for 2024. Software companies are all competing with each other for growth, making the once exciting sector a slog. I sold all but a tiny chunk of our remaining shares, but for around $24-25.
F&G Annuities & Life (FG) sells annuities and life insurance policies, and was one of our big 2023 winners. We sold chunks of shares in Q4 even though it was a short-term capital gain, as I thought the stock had jumped too much too fast. My plan was to sell shares as we lapped our original purchases of in March. But the stock dropped as much as 20%. I am trying to be careful about not confusing this with an outstanding business, but for now the price is a little low and we are holding.
On the flipside, we sold less than 10% of Progressive (PGR) shares over Q4 and Q1, and held on as it rose to new records. Progressive digested inflation (i.e. raised insurance policy premiums) in used car repair costs to reach its target profitability by the end of 2023. The company’s first two months of 2024 suggest that used car repair costs just maybe have stabilized or dropped, making Progressive dramatically more profitable. And Progressive has still been able to grow its customer base. It is an example that an outstanding business that gets it right can see its profitability jump much faster than anyone anticipates.
It may end up being a mistake that I sold our Spotify (SPOT) position. Spotify may end up being an outstanding company, but the price on shares is high. Since I don’t think the audio business – music, audiobooks, radio/podcasts – is that big an opportunity, that price demands perfection from the company going forward. Spotify might get there, but our position was small anyway and in light of the Dropbox misstep especially, I felt better selling and moving on.
Balancing the ups and downs of selling a stock is the hardest task of portfolio management, I’ve found. As we sell stocks, you can assume the thinking will follow the reasons detailed above, with the trade-offs or sources of friction counterbalancing those reasons.
The solution to the selling dilemma is to buy companies you’re sure you’ll never want to get rid of, but that’s not as easy as it sounds, either.
Q1 2024 Portfolio Review: Performance
| Q1 2024 | 2023 | 2022 | 2021 | 2020 | |
| U.S. portfolios | 5.2% | 47.0% | -13.4% | 16.8% | 12.0% |
| S&P 500 | 10.1% | 24.2% | -19.4% | 26.9% | 16.3% |
| Russell 2000 | 4.8% | 15.1% | -21.6% | 13.7% | 18.4% |
| S&P 600 | 2.0% | 13.9% | -17.4% | 25.3% | 9.6% |
| Nasdaq | 9.1% | 43.4% | -33.1% | 21.4% | 43.6% |
| European Portfolios | 4.3% | 13.4% | -15.3% | 4.5% | 18.3% |
| Euro Stoxx 50 | 12.4% | 20% | -11.7% | 21.0% | 3.5% |
| DAX | 10.5% | 19.2% | -12.3% | 15.8% | -6.3% |
Disclaimers and notes:
One of our biggest portfolios is new and came to me with large positions in Amazon and Apple. Those two stocks’ performance weigh on our results disproportionately. Excluding that portfolio, our portfolios were up 4.8%. I’ll report that number through at least 2024.
I am reporting after-fees numbers. I take fees out at the beginning of the following quarter, and most of our portfolios weren’t charged in Q1. Fees vary, and I have my personal accounts’ performance included, further reducing the ‘average fee’. Subtract 0.25% (1% annualized) to get a ‘truer’ representation of what a new client’s performance might look like.
Portfolio stats
- Our portfolio level price to earnings for trailing 12 months (TTM) was 21.35. Our price to free cash flow TTM ratio was 17.3. This compares to 19.4 and 15.2 P/E and P/FCF at end of Q4.
- Cash and equivalents (the ETFs MINT, JPST, SGOV, and BIL, and short-term U.S. T-bills) was 14.7% of our quarter end portfolio, with an estimated average yield of 3.9%. This compares to 20.5% of our portfolio and 4.4% yield at the end of Q2.
- We bought 0.8% more equity positions than we sold in Q1.
Our top 12 positions as of March 31, 2024:
- Amazon (AMZN) – 15.5% of our portfolio2
- Apple (AAPL) – 12.4%
- Atkore (ATKR) – 6.6%
- Progressive (PGR) – 4.8%
- Axcelis (ACLS) – 4.5%
- Discover Financial (DFS) – 3.7%
- F&G Annuities & Life (FG) – 3.3%
- Grupo Aeroportuario del Centro Norte (OMAB) – 3.2%
- Broadcom (AVGO) – 2.7%
- First Citizens National Bank (FCNCA) – 2.7%
- Aercap (AER) – 2.5%
- Booking Holdings (BKNG) – 2.4%
Q1 Winners/Losers
| Winners | % Gain | Losers | % Loss |
| AMZN | 2.6% | AAPL | -1.6% |
| PGR | 1.2% | ACLS | -0.7% |
| ATKR | 1.1% | Eventbrite (EB) | -0.6% |
| Arlo Technologies (ARLO) | 0.7% | FG | -0.5% |
| DFS | 0.6% | DBX | -0.4% |
| Worthington Steel (WS) | 0.5% | OMAB | -0.2% |
New Stocks
Archers-Daniels-Midland (ADM) – I like buying companies with long track records of success who go on sale for short-term reasons. Charles Schwab a year ago is an example.
Archers-Daniels-Midland is one of the biggest grain traders in the world – part of the ABCD group along with Bunge, Cargill, and Louis Dreyfus, that controls 90% of the global grain trade.
The short-term reason for its drop is that the company suspended its CFO and announced that it had accounting problems. This is never a good sign. It became clear quickly, however, that the problems were localized to the company’s nutrition segment, its smallest, and that the problems involved how its different segments valued sales from one unit to the other, meaning it had no effect on the company’s overall financials.
This is not good news, but it’s not “24% stock drop” bad. Everything ADM has said since the news broke has suggested the accounting issue is not material to the business, and earnings have been in line with expectations. Since then, reports have come out about the government investigating other parts of ADM’s business. It’s possible there are more cockroaches here, but I think the likeliest impact is on the executive team’s employment.
ADM’s longer-term business prospects is my bigger concern. The company is cyclical, meaning it’s not easy to expect steady, consistent earnings growth. ADM peaked in 2022 as the Russia invasion of Ukraine caused grain prices to go up; we are now closer to the bottom of a cycle. That said, buying a company with a strong balance sheet at less than 10x bottom earnings usually works out well. ADM is paying a 3%+ dividend and buying back a lot of shares, both signs of confidence in the business.
TD Synnex (SNX) – TD Synnex is a technology distributor. Classically, that means it buys computers and phones from Apple and Hewlett Packard and Dell and so on, and then re-sells them to small businesses and other companies. SNX is focused on adding more software customization and value-added IT support to its customers, as a way to improve margins.
The company is the combination of Tech Data and Synnex. I owned Tech Data for a stretch in 2019-2020, at which point a private equity company bought it out (beating an offer from Berkshire Hathaway). I’ve been curious in buying shares since, and we got a better price than we would have at the Synnex/Tech Data deal’s close in 2021.
On its latest earnings call, the company said PC buying is starting to grow again after working off a covid hangover. AI-enabled technology and software is very buzzwordy, but SNX may benefit on the margin for that. This sort of company tends to trade cheaply – its margins are very thin as a reseller – but if its business is accelerating, this will work out well. We bought shares at around 10x 2023 or 2024 free cash flow, and SNX’s medium-term target is to grow free cash flow 25%.
Vimeo (VMEO) – Vimeo is a video streaming and production service. It has been a terrible stock ever since coming public, spun out from Interactive Corp (IAC). I have followed it a little over the years – I like companies that aren’t quite profitable but have positive free cash flow and don’t need to raise money, as they tend to see their stocks go higher as they cross to profitability. But Vimeo has stopped growing, which kept the stock on a downward path.
I bought shares on reporting it was considering a sale to Bending Spoons. Those talks fell apart in the last week of the quarter, and the stock dropped a lot. The rule with special situations is only buy if you’re prepared to own the stock afterwards (or get out quickly). I feel ok with a small position in Vimeo at such a low price, though I don’t plan to buy much more.
Worthington Steel (WS) and First Citizens National Bank (FCNCA) – We significantly increased our positions in each of these companies Q1.
First Citizens sold off the morning after a good earnings report, so we bought shares before the market corrected itself. Those buys, adding the stock to a couple new portfolios, and its subsequent growth make it a top 10 stock for us.
Worthington Steel takes raw steel and turns it into more useful products for auto makers, tractor companies, construction businesses, and electrical companies. It is also in part a commodity company, tied to the price of steel. Commodity companies and auto parts suppliers usually trade cheaply, as they are very cyclical and thus volatile in performance.
But WS was also spun off from Worthington Industries. Spin-off strategies have been less interesting in recent years, but I find cases where the parent company is small enough, the spun company is not loaded with debt, and it starts out cheap can turn into interesting stories, because the market has a hard time figuring out what normal earnings are. That worked for FG, and WS is on a similar start, with a strong earnings report and still trading at 6.5x trailing EBITDA, 10x trailing free cash flow, and 12-13x expected earnings.
Other Position News
Discover Financial Services (DFS) has been a frequent topic in my letters over the last year. That may soon end. The credit card issuer and payments network provider agreed to merge with Capital One Financial (COF), another major credit card issuer. The price is a cheap one for Capital One. But I like this as a DFS shareholder for two main reasons:
- It seems like a good match. COF is a founder-led upstart, and has become a huge brand name. Discover is not as big as a bank, but brings a payments network that, with Capital One’s muscle, could better compete with Visa and Mastercard (counter-argument). The deal is in all shares, so if it goes through, we won’t have to pay a tax at the transaction and will still own a piece of the combined company.
- The deal might not go through – it’s a big merger, and politicians in both parties have called for it to be scrutinized or blocked. If it doesn’t, Discover would drop maybe 15%, all things being equal.
But, this deal buys Discover time and less scrutiny to work through its recent problems – compliance issues and a bad ‘cohort’ of loans (i.e., I think, its credit card and loan customers during the pandemic are less likely to pay off debt than average customers).
We probably don’t get a final answer on this deal until 2025. If it is a no, Discover should be through its hard stretch and back to cleaner earnings growth. And in the meantime, the shares will be tied to Capital One’s shares, making the quarterly earnings less fraught.
Axcelis (ACLS) was a major loser for the 3rd consecutive quarter. We bought shares for the first time in 16 months.
There is fear that air going out of the electric vehicles balloon; ACLS has benefited from machine sales to companies that make chips for cars. This is not all EVs – there’s also hybrids and the ‘electronification’ of the car (touchscreens and what not) – but electric vehicles are important to this story. Axcelis forecast no growth in revenue this year and potentially lower earnings, while sticking to its growth target for 2025.
At our latest buy price, Axcelis shares were worth 13.2x last year’s earnings, adjusted for the cash the company has. That number is 14.7 for 2024 expected earnings, and 11.5x 2025 expected earnings. If Axcelis reaches its 2025 goals and continues growing from there, this will be a very cheap price. If the semiconductor industry has a hangover, or China-U.S. relations worsen significantly, or AI proves to be a total bust, the price could be expensive or it could be just ok. I think the risk reward is decent where we are now.
Eventbrite (EB) was one of our new stocks last quarter. Its earnings report was disappointing. The company gave a revenue growth forecast of 13%, give or take, which was much lower than expected. It reported that new event creator growth, the key engine for the business, would be stagnant for the year. That isn’t surprising in and of itself – Eventbrite raised prices last year. But it is disappointing the management team didn’t seem to anticipate or warn of this possibility earlier.
The shares are still quite cheap – cheaper of course, after a 30% drop – and the company is growing. If it can digest the price hikes and attract new creators again, this will work out well. If it doesn’t, Eventbrite becomes an attractive sales target at some point. I’m not rushing in to buy a lot more shares, but so far, it’s only one strike against the team.
Sales and Small trades
We sold all but a trivial amount of our Dropbox position, and closed our Spotify position.
We also closed small positions in Mosaic Co., Worthington Enterprises, and DTE Energy.
In personal accounts, I closed a short position in Sprout Social. Shorting remains something for personal accounts as I get more experience with it.
I also bought and then sold Google and Hibbett shares, closing both positions, and sold and bought Dallas News shares, keeping it an open position throughout.
We trimmed positions in Arlo, Apple, Amazon, F&G, and Progressive (though only barely in the last two names).
Interested in more from Middle Coast Investing? Or in talking to us? Get in touch.
Disclosure: I am long or short all positions as mentioned in this letter. I may change positions at any time. I have no immediate plans to make major changes. This is not investment advice. Investing is risky. Any investing decisions are your own responsibility and should be taken after speaking with an advisor or at your own risk. This is not a solicitation to buy or sell anything. Past performance is of course no promise of future results.
Disclaimer: I calculate performance and all portfolio figures manually, so it may be prone to error. The accounts I manage may deposit or withdraw money over the course of a quarter. I account for that in my calculations by adding/subtracting that money to/from the starting amount at the beginning of the period. This means withdrawals intensify performance and deposits dampen it. For half-year, 9-month, and full-year performance, I multiply quarterly performance by one another to control for deposits/withdrawals. If there’s a better way to calculate, please tell me!
Please read our full performance disclosures.