CMG - The Companies I Sold In 2023: Unveiling The Reasons Behind My Decision

2024-01-01 22:35:34 ET

Summary

• Here are the companies I've sold this year and the reasons behind each decision.
• There are valuable lessons you will read here that will help you avoid mistakes.
• My selling goals for 2024 are to avoid overpaying, minimize actions, and always consider the opportunity cost.
• I'm being fully transparent, revealing my losing positions as well as my winning ones, along with all of my mistakes.
• I focus on investing in the highest quality and growing businesses in the world while avoiding overpaying.

Opening

I am a relatively young investor, continually evolving on my journey to discover the best companies in the world. Last week, I published my long-term portfolio with explanations of each holding, providing my ratings for each security based on current prices.

Today, I will introduce the companies I've sold in 2023 and explain why. All the companies I mention here are ones I've completely divested from, but I could potentially initiate a position again at the right price. It's important to note that I lean more towards being a quality investor than a value investor, although I do make value investments from time to time. My preferred approach is to invest in outstanding businesses with the potential for multiple expansion.

Most of the companies discussed here are high-quality compounders that didn't align with my portfolio and long-term goals at the time. Some were sold due to inherent business problems, others due to valuation concerns, and some simply because I wanted to allocate funds to other opportunities. I recommend reading the article about my portfolio as it will provide more context to my sales.

Why would I sell a business?

My approach is to minimize actions to reduce costs. I also aim to let my winners run. I'm not a value investor who sells as a company approaches fair value. If a company is trading at a fair valuation but is of high quality, I'll simply enjoy the compounding effect. If the company becomes overvalued or significantly overvalued, I would trim my position and allocate the money to better opportunities. The general rule is to be less active because more actions lead to more mistakes and more costs.

Another reason for me to sell is a disruption in the business model or the business environment. If I feel that I won't be able to foresee potential future threats to my company, I would not feel safe owning it, even if the numbers look appealing.

Another reason is a change in management or the ownership of the business. In the last year, I've learned to appreciate the people behind the business, as they are one of the main reasons for a compounder to become such. Management changes that I don't like will trigger me, or if a family-owned/founder-led ownership changes.

I've also sold stocks without inherent business reasons, just because I found a better opportunity for my money—some I've sold at massive profits, and some at massive losses.

It's important to note that probably a few of the stocks I've sold will be very successful, as I don't know everything and just make the best bet at the time. Some of the stocks on this list probably would fit into other portfolios, whether it's a dividend portfolio or a growth one. And some of the stocks here are outstanding businesses, but at the right price. Let's start.

JD.com

This one caused me the most losses and serves as the best example of not holding onto losers just in the hope of breaking even someday. Along the way, I realized the opportunity cost I was incurring by holding onto this loser. I could sell at a loss, bid farewell to the stock, and find a better use for the cash, possibly achieving greater returns than waiting for a break-even point.

I sold JD.com ( JD ) because I lost all belief in Chinese stocks. While I acknowledge it's a good business, along with others like Alibaba ( BABA ) and Pinduoduo ( PDD ), I couldn't bring myself to invest there. Especially with my concentrated portfolio, where every security is at least 3%, and most are above 7%, I can't guarantee that the government won't decide to halt the business for some reason. I can't even believe that the future cash flows of the business are mine as a shareholder. Trust plays a significant role in investing, and unfortunately, even at a 9-forward PE, it is not appealing to me. So unless there are major positive developments regarding US-China relationships, and even after that, I wouldn't invest there. But this is just my risk-averse approach. I can understand investors who are drawn in by the prices of JD and BABA.

Automatic Data Processing

I think this is a great business with a high ROCE, a solid long history, and consistent growth. I sold ADP ( ADP ) due to a combination of three factors:

Firstly, I bought it when it was below its multiples averages, considering it undervalued in my view. However, the multiples expanded along with the market, reaching fair value or possibly even overvalued at the time. I might have held onto it if not for the next factors.

Secondly, I seek higher growth, and ADP is a pretty mature business with revenue growth in the mid-teens. I prefer to invest in businesses with top-line growth at least high single-digit and preferably double-digit growth. I believe combining ROC (ROCE/ROIC) with solid growth is a winning combination.

The third factor was other good opportunities I wanted to allocate cash into, such as Evolution AB ( EVVTY ) or Chipotle ( CMG ).

Adyen

This is a significant lesson in valuation for me. I bought Adyen ( ADYEY ), captivated by its high quality — amazing FCF margins, high ROC, 30% top-line growth, operating leverage, founder-led, great culture, quality management, and a growing industry, among other factors. However, I paid too much for it, way too much. It's challenging for a business to justify an 80 times earnings valuation, even with amazing growth prospects. There will be bumps along the way, and the impact of the super-high valuation will be harsh. It came to fruition with the 50% drop in August.

Around that time, I learned another important lesson: the market often overreacts. The stock went to around 35 times earnings, and I capitalized on that, believing the market had overreacted, and this amazing business was now cheap. I bought a substantial chunk, enough to reduce my average price significantly. Then came the investor day, and the company started its way up again, reaching above 60+ times earnings it is now.

Along the way, I understood that this industry is too competitive and disruptive for me, and I wouldn't be able to recognize threats in advance. The combination of my now more sober valuation and the conclusion that it is again too expensive, along with the complicated business outlook, made me decide to sell the stock at a decent profit and wait for it at a more reasonable price and a clearer business outlook.

Indeed, important lessons. I will never pay way too much again.

Amazon

Amazon ( AMZN ) was one of my most successful holdings; I believe it has one of the widest moats in the world. It possesses a great business model, a good growth path, and numerous ways to integrate profitable business models. I sold Amazon because I prefer higher ROC businesses, acknowledging that it is a growth business that needs to invest a lot of capital to achieve future profits by sacrificing them now. However, I wasn't quite sure when those profits would materialize for me as a shareholder. Additionally, I observed other similar retailers with comparable business strategies like MercadoLibre ( MELI ) achieving higher margins with even higher growth.

Moreover, the multiple expansion from where I bought was alive and kicking, and I successfully sold my position. I am confident that Amazon will come back to my portfolio sometime, perhaps more mature with higher returns on capital. This is because I believe its moat is amazing and expanding. I am very pleased with this choice, as I think I found better opportunities for the long term.

Philip Morris International

Philip Morris ( PM ) was the rock-solid cash-producing security in my portfolio, and it performed its job well. The main reason I sold out from it was that it wasn't a good fit for my quality growth portfolio. Similar to ADP, it has mid-single-digit top-line growth, and even lower, and this kind of growth is too low for me. It does have some high-quality traits, such as high ROC, and growth avenues through heated tobacco products, but it is not the current fit for me at my current stage as an investor. However, I believe this is a great choice for dividend portfolios.

Airbnb

Airbnb ( ABNB ) was a tough decision for me. I believe it's a great business with many high-quality compounder traits: high organic growth, margin growth, high and growing returns on capital, and Brian Chesky, the founder, as the CEO, holding 30% of the company. Airbnb offers a good service, and personally, I have enjoyed the product.

However, there are a couple of reasons for my sell. Firstly, the current environment is not the same as a few years ago. Customers are complaining about high prices and numerous fees and tax problems. I personally experienced this in Barcelona. Customers feel that the price for value is not satisfactory, and they can get a better service at a similar price in hotels. The customer sentiment is a bit off, and I believe Chesky is working to address this issue.

Another reason for my sell is the rising threat of regulations. We've seen the ban on short rentals in New York , and there are increasing complaints from residents about the disruptions Airbnb houses bring to their neighborhoods. I'm confident that countries will take action on this front. The high unpredictability of these factors concerns me, and I prefer to invest in the most predictable businesses out there.

The third factor is that I believe Airbnb's main competitor, Booking ( BKNG ), has a much better business for the long term due to its diversification among other travel features and the ecosystem they are building. I recently wrote an article about Booking.

Regardless, Airbnb has a good price relative to its growth, with a 16 PE. However, the uncertainty is too much for me, even at such prices.

Crocs

Crocs ( CROX ) is a recent addition to my portfolio. I wrote an article in October when it was around $85, rating it as a strong buy. Since then, two things have happened: the price surged, and the HeyDude brand showed weakness. Crocs is not a typical business for me to own; it is more of a value play, as I don't see it as a wide-moat company at all. However, the price was very low.

In my view, Crocs' main problem is its dependence on one brand, which is risky as consumer tastes change, as happened to Crocs in the past. The diversification into HeyDude was a good move, but the results are messy. HeyDude is not growing and is showing severe weakness. This made the mid-single-digit growth rate seem reasonable, and the post-surge valuation looks very different.

I sold the stock at a good profit, recognizing that this was mainly due to luck during the market rally. I also wrote an article explaining why I downgraded the stock. It is still a buy in my view because it is at a very low price, especially after the December drop, and Crocs shoes have great momentum that could keep the growth up. I would be careful with Crocs now, even with the low prices at 7 times earnings.

Conclusions

These were my sales for 2023. I hope I provided you with additional information about those companies, as well as valuable lessons and mistakes to avoid. It is important to note that most of those companies were not major positions in my portfolio, and my core positions are standing strong. I learned a lot from those sales, and I am very satisfied with most of the decisions.

My goal for 2024 on the sell side is not to overpay, always consider the opportunity cost, and minimize actions, as more actions lead to mistakes and are also costly in terms of fees. Again, I recommend you to read my long-term portfolio breakdown for a more complete picture.

Hope you had a good read. Let me know your thoughts on this one.

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