The Undervalued Opportunities portfolio on Covestor delivered a solid year of returns to investors in 2013, but I’ve always been cognizant of long-term success. In fact, 2014 has started off significantly negative.
My largest holding entering the year was a concentrated position in SodaStream International (SODA). On Monday, the company pre-announced terrible fourth-quarter guidance significantly below its previous estimates.
I’m at a loss for words on how badly management has misguided 2013 numbers, as shown below:
As the table shows, the revenue numbers missed expectations slightly, but the real damage was done to the company’s net income. It’s hard to imagine a 20%+ revision just two months later.
The issue is heightened when you realize that the revision is covering just the three months of the fourth quarter. Earnings were expected to be about 65 cents a share and are now coming in at close to zero for the fourth quarter. It’s appalling for an investor to listen to management guide considerably lower after only two months of retail operations, without much explanation.
In many instances, I would stick by the management team and potentially add to my investment, but my trust in management has been lost. I don’t believe that the corporate suite has any idea on its U.S. projections for this year or even this month. They have been spending money on a Super Bowl ad (featuring Scarlett Johansson) when I think they should be spending money on leadership.
As an investor, I require a management team that gives shareholders appropriate expectations and guidance. My risk controls have been triggered, and I believe the best possible reaction is to look for better uses of cash.
As I look into reducing risk over my portfolio, I need to be aware of changes to my investment thesis. Here, my understanding from the management team has shown a lack of vision and know-how. Many investors continue to talk about the innovation within SodaStream, but the issues that have arisen have been accentuating. Inventory levels had been rising and it looks like management has no idea on its growth prospects within the U.S. For this reason, I’ll most likely consider selling half my position while I monitor the company’s operations in the early part of 2014.
Overall, I will stick to the portfolio’s long-term growth plan by finding the most appropriate investment opportunities in the market.
In general, I remain cautiously optimistic about the market’s prospects in 2014. I am currently invested in Yahoo! Inc. (YHOO) where I see continued growth in 2014. The company’s Asian assets remain a great source of potential appreciation, and with the mobile push gaining traction, we may see Yahoo announce a core surprise in the near term.
I’ve also been looking to lighten my investment in growth stocks in favor of value stocks for 2014. Many of my growth investments have run too far, too fast. As I look to rebalance the portfolio, I’ve been seeking out value investments. In my opinion, a few of those names are Goldman Sachs (GS), Dunkin’ Brands (DNKN), and SoftBank (SFTBY). I have also been increasing my short ideas, and will be looking to increase short-side investments in early 2014.
On the whole, I expect an average year of returns in 2014 with added volatility in the markets. I believe Monday’s negative reaction to SODA should be a minor blip in the overall long-term performance of the portfolio and will continue to seek out profitable investments (on both the long and short side) in 2014.
DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. All investments involve risk and various investment strategies will not always be profitable. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
Clearbrook Capital Advisors LLC is a registered investment advisor based in Massachusetts. The firm seeks to employ an investment strategy that balances bottom-up stock selection with an evaluation of general market conditions. Eric Steiman is the founder and the Managing Member of Clearbrook.
Clearbrook believes in balancing the fundamentals of bottom-up investing against the backdrop of stock market cycles. Clearbrook applies methods of technical analysis in its security selection and market analysis. Generally, the firm seeks investment in companies whose securities it believes are undervalued by the market and can be acquired at a discount to its estimate of intrinsic value. Additionally, Clearbrook will engage in short selling opportunities if it feels certain securities or the market as a whole may be set to decline.