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Jun 29, 2018

“FLEX”ing For Profits

by Benj Gallander

Benj GallanderIn Benj’s best-seller, The Uncommon Investor III How to Earn Superior Returns in the Stock Market Despite Everything, there is one whole page where it states, “Without discipline you have no method.” Yet, when Flex Ltd. hit the initial sell target of $18.74 in November, we did not sell, nor when it broached that value by almost a dollar in January. What gives?

First, it should be stated that discipline remains our mantra. But sometimes there are “conflicts” in the rules. For example, we dislike selling big winners in November or December as that means that the tax people must be paid the following April. By waiting until at least January, tax can be deferred, which is a wise investing decision. That enables us to use the funds in our possession for a longer period of time and hopefully, earn money on money so to speak.

Second, Flex often does well at the end of the year and first few months of a new one. Part of this is likely stock specific but on a macro scale, the end of the year often features the Santa Claus Rally and the January Effect, both pushing markets higher. While that does not happen every year, probability dictates that it is likely.

Next, it is rare that our initial sell target is lowered, but this one was pushed down from $26.24 in 2013, as that price was deemed extravagant. Yet, somewhere in the back of our brains, we wonder if that number was indeed so out of whack, especially since virtually every stock that we sell continues to climb, sometimes by quite a bit. The diminished share count, which was around 821 million in 2010, has fallen dramatically to the 528 million range and gives us reason to pause. That indicates that if the earnings are the same now as in 2010, the Earnings per Share (EPS) will be much greater due to the reduction. That often sparks stock price appreciation.

This share buyback, which might have made sense when the stock price was far lower, is a questionable use of cash. Many companies love to do this, but given that the book value is $5.65 why in heck would an enterprise pay triple that or so to repurchase? It boggles our minds. We have suggested to management that dispersing dividends is wiser, but they have chosen not to act on our desire. Alas, it is not the first time that we have howled in the wilderness.

For the most part, Flex is firing on all cylinders. The bottom line has been black since 2009, there is about $1.3 billion in the kitty, and a major deal with Nike that was signed in 2015 has progressed reasonably well. The latter has required a major investment from Flex and is a primary reason that the debt load has grown by about $1 billion since the agreement was inked. Fortunately, the company’s balance sheet was in excellent shape and while this muddies the it somewhat, the debt tally remains quite reasonable.

Like many stocks, Flex’s stock price was slashed during the downturn. While second guessing has naturally occurred, at the end of the day, we remain content with our decision and no thought was given to selling at a lower price.

One email that arrived recently during the February market carnage asked “Hold and prosper? Sell. Or Pray!?” Often though it seems illogical to many people, doing nothing is the best action, which is our modus operandi here. Well a little prayer will not likely hurt.

With any luck, perhaps some if not all this position that is the oldest in the portfolio, circa 2006, will be dispensed shortly. While not counting on that, if markets resume their uptrend, Flex likely will too. Selling it would make the portfolio much younger, kind of like Botox for our collection of stocks.

 

Benj Gallander, MBA, Co-editor of "Contra the Heard", Toronto, ON gall@pathcom.com, www.contratheheard.com