On selling a position
I regard selling a position as the really hard part of investing in stocks. I find it so much more difficult than buying into a position. It has always been challenging and I reckon it will always be so. Why is that?
Firstly, because intrinsic value has got a dynamic dimension. I touched on this subject in the post: Peter Cundill and the Art of being flexible.
Peter Cundill - Value Investing And The Art Of Being Flexible
Secondly, when holding a position it is hard not to get emotionally attached to it. Especially when the stock you were holding for an extended period of time had been showing satisfying qualitative issues too, e.g. shareholder friendly payout policy, new promising products, good corporate governance in general, smart capital allocation, etc.
And, last but not least, one has to overcome its greediness. As an value investor you usually buy on an asset basis during the latter part of an late stage momentum downturn. You haven’t felt the really painful and nerve-wracking part of the early/- and mid range momentum downturn, but rather most of the time the early-/ mid range momentum upturn phase. This phase is usually accompanied by positive earning momentum, positive analyst calls and an established upturn trend in the stockprice. It is very hard to detach from those positive noise surrounding the stock you are holding and that had been (hopefully) such a kind contributor to the overall portfolio performance.
But that is what a value investor has to do. He has to buy on an asset base and sell when profits (especially future profits) become the focal point by the investment community. And that is harder done than said. It is just not an easy task!
On Astellas Pharma
I have to admit that Astellas Pharma wasn’t a genuine idea of mine. It was a stolen idea. The stock came to my attention when it was mentioned by Jean- Marie Eveillard and Charles de Vaulx. True value investors with a great track record.
Many investors don’t mind stealing ideas from other investors. Personally I am not such a huge fan of generating investment ideas by simply copying other investors. Not so much because of moral issues. The main reason I personally don't like copying is, that I usually haven’t got the same (strong) conviction about a stolen idea compared to a genuine generated one.The best outcome of all is a stock you have found and researched on your own and later find out that other great investors hold them too. Such a factor reinforces my conviction. It gives me even greater ability to hold on to the stock should the obligatory draw down occur after initiating the position.
Anyways. Although Eveillards and de Vaulx supplied me with a ticker symbole at the beginning of 2010 I did my own research. And what I saw on the valuation front was more than satisfying.
The (stated) price ratios and profit margins were already very encouraging when taking into account the high quality franchise of this company. Furthermore, the company had been showing an extremely shareholder friendly payout policy in the past. And finally the corporate governance framework was (and is) very encouraging, with the majority of directors on the board being independent outsiders.
But the real undervaluation of Astellas didn’t become apparent by only concentrating on the price ratios, but rather focusing on EV, Ebit, Ebitda, etc.
After adjusting for the huge cash pile (roughly 30% of Market Cap) and conservative accounting, in 2010 Astellas wasn’t only cheap. It was a steal! One could get maybe one of the best japanese pharmaceutical companies at an EV/ Ebitda ratio of roughly 4. The average ROIC (10 Years) was around 19%. And this was after substracting the huge dividend payments from NOPAT!
I bought the stock in the range of 3'000 – 3'300 Yen between beginning of 2010 and til beginning of 2012. Although languishing at the beginning it treated me well. Furthermore, it taught me the importance of patience and dividends when venturing into the value investing sphere. Regarding the importance of dividends there is a great controversy about it in the (value) investing community. But I find it very comforting being paid for my patience.
So why did I sell?
Mainly because of Astella's valuation. In the end it should always boils down to the valuation of a stock.
And that is what the present value situation looks like in Astella’s case.
Astellas still is an outstanding company. But with an EV/ Ebitda ratio of 14 and EV/ Ebit ratio of 20 the market has fully recognised those facts finally. In the 4 years of holding the stock it returned a 24% p.a. (excl. Dividends) in Yen terms. That is more than a decent return.
Although the valuation is very rich by now, it wasn’t an easy sell at all. The management does all in his power to please its shareholders. Finding such companies in Japan is not an easy task, as they are rare. It has been and is truely focussing on maximising shareholder value. Having said that I have to admit that I was not too pleased about the last share buyback by the company at around 6000 Yen. Personally I would have deemed an increase of its dividend the better choice.A share buyback at those stockprice levels won’t have such a great impact on inflating the EPS. However, one has to state that from a corporate governance point of view Astellas is rather an anglo- saxon company, which happens to be listed in Japan.
Maybe in 10 years time I will look the stock up again, just to find out it was a 10 beggar. I should not remorse over such findings.
I am an value investor. And at this moment of time no (quantitative) value is to be found at Astellas Pharma. But still loads of value is to be found in the overall japanese stock market and even in the japanese pharmaceutical sector.
It is time to behave like a good christian, say good bye to Astellas, to wish the company all the best for the future and to move on.