Back to business

Okay, so things have been dormant for a bit as I've had to focus on a couple of different things through the year and this blog went on the backburner. As I find myself with a a bit of time as we approach year-end, I thought it would be best to go ahead and jot some reflections. Penning down some thoughts is generally good for holding oneself accountable, validating past hypotheses, and also sharing my perspective with readers. So here goes...

The final earnings season of most US stocks is pretty much out of the way, and I had a short-lived period of being happy by taking profits off an earlier trade, which evaporated the very next day due to some disastrous results associated with a different counter.

PZZA - the oven gets warmer

The joy was provided by none other than Papa John's (PZZA), a pizza delivery chain fairly well-known in the US. I started a long position in May and was pleased to know that Starboard Value, an activist hedge fund, was looking to shake things up in the company (Starboard's claim to fame is its success turning around Olive Garden under Darden Restaurants - there is a rather dramatic deck of slides relating to this effort). Following some good results, my resting sell order cleared pre-market, and although the share price was to go up a little further over the course of the day, I was quite content with having locked in a 20+% return over a short period of around six months.

Frankly, my read is that the counter still has upside, but with trade uncertainties jumping from "nearly signed it!" to "nope, no deal!" every other week, I think it was good to take some money off the table for this consumer discretionary counter, since this sector is fairly exposed to economic sentiment (although this may depend on whether one views pizza as a normal good or an inferior good from a microeconomics point of view).

RLH - disaster!

The very next day, Red Lion Hotels Corporation (RLH) announced results which can only be described as a disaster, unfortunately wiping out my gains on PZZA and then some (quite a bit actually). It is almost unheard of for a share price to collapse by 50% except in the biotech/pharma sectors, or where there is fraud/corruption, but that's the scale of RLH's drop. I had been tracking the share price closely over the past couple of months and had already reduced my exposure slightly, but I never anticipated that the market would react so negatively to the results (and the CEO's departure ). I listened to the earnings call recording in an attempt to decipher what was going on.

Basically, there were some headwinds in the sector, and the results fell short of expectations. There were also quite a number of franchise agreement terminations, which is bad for the business as RLH moves towards an asset-light model. The remaining owned hotels have also taken quite a while to be sold, something which Vindico Capital issued a pointed shareholder's letter about, but already known prior to the earnings release.

Based on an earlier property count (as of 30 June 2019, from Red Lion's IR Website), it appears that the terminations are largely from the select-service category, from America's Best Value Inn and Canada's Best Value Inn, as well as from Knights Inn (which RLH acquired from Wyndham in 2018). Franchise terminations are part and parcel of the franchise business, and from the earnings call it didn't sound like the terminated properties were gravitating towards a specific competitor. I think RLH has some work to do (possibly streamlining the line-up of brands under its portfolio) for better operational efficiencies.

While I wish I had reduced my exposure further before the earnings call, there's nothing I can do about it now. As it stands, the significantly-reduced market cap of RLH could make it an M&A prospect given its portfolio of over a thousand properties representing nearly 80,000 hotel rooms. I'll have to watch this closely in the next couple of months, and hopefully the search for a replacement CEO ends in an outcome that is well-received by the market.

So what now

My portfolio YTD returns (blue line) took a sharp dive, and it doesn't look like I can come anywhere close to the stellar performance of the S&P (red line, 25% YTD) or even the world index (green line, 20% YTD). If not for the freak incident for RLH, I was tracking the world index pretty well. I take some comfort in having outperformed the Singapore index (purple line), and frankly, finishing the year with around 15% returns is not too shabby.

I've pared down some holdings and am looking towards a couple of anchors to drive returns over the next couple of months:

• AMD, with close to 100% returns YTD, is poised to play a sort of David vs Goliath role against both Nvidia and Intel. Exciting times!
• MU, perennial favourite of mine, and previously mentioned on this blog.
• SQ, currently in the red but holding out for M&A potential - could Google or Apple swoop in?

I'm definitely overweight tech, but its the sector I'm most comfortable with. The long-drawn 787Max issue seems to be almost ignored by the market now, and it's interesting that airlines (even those which had large Max fleets like LUV) didn't get impacted too badly, but I'm sitting on the sidelines for now.

As a final point, and also to allude back to an oft-repeated mantra that investors should think long-term, I managed to cull this chart off my IB reports showing my historical performance (since I started using IB) versus the same four indexes mentioned above. Over here, I'm still ahead of the S&P (if only just, and largely due to pulling way ahead in 2018), so this is perhaps a #humblebrag. Nonetheless, I guess it was always better to have started earlier, and I'm glad I did!