Removing AEO From The Value Focus Portfolio

 

Hello Value Focused Investors,

It occurs to me that my newsletter isn't entirely living up to the name, Value Focus, considering the contrarian coal bet I have in the portfolio. I also have some struggling companies such as hhgregg, which really is a contrarian bet in its own right. The truth is that on both of those, I was trying to go where I believed God was leading me. I still believe he led me to those places. Maybe he will continue to lead me into some of those sort of dark, scary places. Or, maybe one day in the near future, I'll be doing more of the type of buying and selling I did today, in one of the more sensible stocks I've purchased - American Eagle Outfitters (AEO). I don't know for sure where he will lead me tomorrow, but I will do my best to follow!

Back to the topic at hand, here is a quick recap of all the AEO transactions (including dividends received) I've made in the Value Focus portfolio:

2-10-2015 AEO trades

So, it looks like I've had total cash outflows of $16,784.96 on AEO transactions versus total cash inflows of $21,724.96, for a profit of $4,940. I thank God for blessing me with some profitable investing in AEO. But readers are surely asking, why did I choose to sell?

The truth is, I don't really have a good reason for selling it today. I still like AEO. It is trading at 20.5 times forward earnings estimates, which is kind of pricey for a teen retailer that most people seem to believe has its best days behind it. However, that's not really a great reason to sell. As the recent example of Tilly's demonstrates clearly, those estimates can go out the window pretty quickly in this space. Further, AEO is showing consistent improvement since I started buying it with conviction in July and August of last year. I tend to think the company has a lot of potential internationally, in addition to a fairly stable and profitable business here at home. The dividend yield is still very nice. So, it's not like I'm running for the exits in a panic. The truth is that it's always difficult to know when to sell a stock.

But I'm going to be totally honest here - this is not a normal sell situation. As I said, the fundamentals of the business are improving. The medium term (1-3 year) business outlook, in my view, is more positive than negative. I'm simply trying to profit from volatility. This stock has shown a lot of volatility in the recent past over seemingly minor information. The company changed its outlook for the holiday quarter on December 4th, when it released the previous quarter's earnings. The headline in the Wall Street Journal read, "American Eagle Outfitters Outlook Misses Expectations".

Long term investors will appreciate the ridiculousness of that headline. The shares quickly fell from $14.36 on December 3rd, all the way down to $11.91 on December 5th. So, this multi-billion dollar enterprise, in business since 1977, lost 20% of its value (roughly $477 million) in two days due to somewhat softer guidance from management for a single quarter. I'm just trying to make the point that the price movements in this stock are irrational of late. They remind me very much of the behavior of the bipolar fellow Benjamin Graham described as "Mr. Market". So, I see a chance to possibly profit from volatility.

[By the way, if you aren't familiar with the Mr. Market analogy, click on this link and read the section on Mr. Market. It's a great analogy for all investors to keep in mind.]

I say possibly, because this could always turn out to be a huge mistake. The company could come out tomorrow and revise their guidance sharply upward for the current quarter. On top of that, stronger than expected earnings could actually occur and continue on for some time into the future, and I could miss out on huge gains. I simply don't know. But as I weighed the pros and cons today, I believe that God told me to go ahead and act with courage. I have no guarantee of any specific outcome. The direction I believe God gave me was really more along the line of "don't miss out on making a good decision because you are trying too hard to make a perfect decision."

So there you have it: my incredibly non-scientific reasoning for this trade. I certainly hope and pray for a chance to buy AEO back at a lower price in the near future. If I don't get that chance with this particular stock, I will still remain committed to finding the best opportunities that I can find. Of course, I will continue to share those with readers as long as God gives me the opportunity to do so.

Readers who have signed up for free email alerts got a notice in real time today telling them of this decision. As always, the full Value Focus portfolio is at the bottom of this page.

Before I go, I wanted to talk about one last thing that I recently experienced. At the bottom of my personal testimony, I list a lot of scriptures which teach us that Jesus Christ came to set us free from sin and self. When I wrote that, I was mainly thinking about the freedom that Jesus gave me from addiction. However, as I have recently struggled with certain self-centered desires, I have begun to more fully appreciate those scriptures. Jesus didn't just come to set us free from the awful, blatantly destructive, visibly enslaving sins such as addiction. He came to set us free from all of our sinful desires.

Here is a man who was seated in heaven with the Father. He left the glory and majesty and wonder of heaven, in order to come here and sacrifice himself for us. He is the King of all creation, yet he submitted himself to sinful man to be beaten, spat on, mocked, and nailed to a cross to die in agony. He did this to demonstrate his love for us, and save us from our sin. He could have chosen not to do this, and he still would have been fine. But we would not have been fine. I can't help but think how difficult it was to endure the mocking, the beating, and the insults of human beings who did not deserve to be in the presence of God's son. Yet his response to all of this was simply, "Father, forgive them, for they know not what they do."

I don't know about you all, but when another human being starts to challenge me, cheat me, lie to me, belittle me, insult me, or attack me, my first response is not one of mercy and compassion. I am a sinful human being. Don't get me wrong - I've been washed in the blood of Jesus. I've been pardoned of my transgressions. But I still live in a sinful human body, which the Bible often refers to as "the flesh." That flesh tends to want to crush anyone who opposes me. That flesh tends to want to lash out. To retaliate. To get revenge. But Jesus came to give me freedom from those kinds of desires. He tells me to let him handle such problems for me. My response is to be one of mercy, compassion, forgiveness, and loving kindness. But even when I want to choose the right response, my flesh hurts. It cries out for revenge. That's what Jesus came to set me from - the desires of the flesh.

Once I allow him to have his way with me - when I choose to obey him rather than follow my flesh - I can find that freedom. He gives it so freely. All I have to do is ask. I cannot describe to you what it's like. I can only say that it results in peace and joy beyond anything I've ever known. When I choose to do things God's way, I find that my fleshly desire will eventually die. Not only that, it will be replaced with a new desire - a desire to bring glory to my father, and to truly love others, even when they are attempting to hurt me. That gives freedom. I will never be able to control what other people say and do. But I can control my response. When I respond in love, the results speak for themselves. Good things happen, and I feel absolutely wonderful! That feeling, that joy, that peace, my friends, is priceless!

What a wonderful place this world would be if we would all simply accept the love, the freedom, and the forgiveness that God has poured out on us through his Son, Jesus Christ!

Sincerely,

Chris McKinney

2-10-2015 Portfolio 1

2-10-2015 Portfolio 2