The New Focus on Long-Term Strategies
How often do you trade your stocks during a year? Do you turn over your portfolio an average of once a year, twice a year or a dozen times a year? In this age of super-fast computers that are programmed to trade in nanoseconds (one billionth of a second), should we trade more often to keep up with the ever-changing stock market?
My opinion is no—more trading does not improve your returns. Holdings stocks long term does.
I recently attended the 29th annual CIRI (Canadian Investor Relations Institute) Conference in Quebec City, Canada. The main topic for the conference was “Creating Value for the Long Term.” Companies in Canada are now being urged to share their long-term strategies and goals with investors rather than talk strictly about short-term financial results.
The issue is that companies have been focusing their attention on meeting or beating quarterly estimates rather than concentrating on marketing, research and developing new products and services. The pressure on companies to produce better quarterly results now and disregard long-term consequences is hurting companies and investors alike. Hopefully, CIRI’s push to encourage Canadian companies to emphasize their long-term plans will enhance investor experiences (higher returns), and then spread to U.S. companies as well.
The current emphasis on quarterly financial results and the media hype created by each and every tidbit of information leads investors to hit the sell button too quickly. Unfortunately, the “sell now and ask questions later” world that we live in affects professional investors as well as individual (retail) investors.
I believe the trend by companies to release more information about longer-term strategies will encourage investors to buy and hold stocks for longer periods of time. By holding stocks long term, the result will very likely be more consistent profits.
Don’t Sell Too Soon!
Two years ago, I wrote here about studies that confirmed what I have been preaching for decades. Most investors sell stocks too soon. Mark Hulbert, founding editor of the Hulbert Financial Digest, recently compiled a huge database to find out how the frequency of portfolio transactions impacted performance results. He gathered 30 years of history from hundreds of investment advisories.
For each advisory, Mark Hulbert and his staff made a comparison of how the portfolio actually performed in each year compared to how the portfolio would have performed if the portfolio recommendations remained the same (frozen) from the beginning of each year to the end of each year with no transactions.
Since the early 1980s, two-thirds of the portfolios would have performed better by not buying and selling during the year, focusing instead on holding stocks long term.
Furthermore, in EVERY year, the frozen portfolios as a group performed better than the portfolios that traded during the year.
An additional study lends credence to Mark Hulbert’s findings. Two finance professors in California studied the trades made in 10,000 randomly selected accounts at a major discount brokerage firm between January 1987 and December 1993.
The study focused on cases in which investors bought a stock less than 30 days after selling another. The researchers found that over the 12 months following the transactions, the stocks that were sold performed 3.2% better than the stocks that were bought. Investors would have been far better off had they done nothing. Keep in mind that the Cabot family of investment advisories outperforms most other advisories because of the time-tested methodologies they apply.
(Additional details of the studies can be found in my May 15, 2014 Cabot Wealth Advisory.)
How Often Should You Trade Your Stocks?
There is no answer, because it all depends on what type of stocks you are buying and selling. I am a conservative investor, so I tend to hold onto my stocks for about 24 months, on average.
The data and studies seem to suggest that the longer you hold the stock, the larger the profit. I advise using sell targets with the goal of achieving maximum gains within two years.
And holding stocks long term has another benefit—dividends! A company’s ability to continually pay dividends provides concrete evidence that the company is performing well. Also, rising dividends indicate that management and the board of directors expect the company to perform well during the next several years.
The Mark Hulbert and professors’ studies provide clear evidence that most investors, even professional investors, sell too early and leave profits on the table. This is understandable. So-called “sell rules” often fall short of their intended goals.
The current panic selling in stock markets around the world is an excellent example of investors’ penchant for selling without thinking things through. I’m confident that the leaders of the world will come together and calmly work out solutions to problems created by the United Kingdom’s exit from the European Union.
But until then, today’s high-pitched emotions have produced a barrage of over-reactive selling—and the days ahead are likely to provide some excellent opportunities to buy leading stocks at bargain prices.
A Canadian Stock to Buy for the Long Term
Avigilon (AVO.TO: Toronto Stock Exchange Current Price 12.67; AIOCF: U.S. Over-the-Counter Current Price 9.69) is a leading designer, manufacturer and marketer of network-connected video surveillance systems, surveillance cameras and video analytics (software that scrutinizes video input). Its customers include police departments, schools, hospitals, prisons, airports and public transportation systems. Avigilon provides the security video systems for San Diego’s public transit system, Toronto’s Rogers Centre stadium, the entire University of Tennessee campus and many other venues. Avigilon is headquartered in Vancouver, British Columbia.
Avigilon’s stock price has been on a roller coaster ride since its debut in October 2011 and has dropped 63% during the past two years. Yet recent news from the company continues to be positive and sales are climbing rapidly.
Avigilon’s research goal is to upgrade surveillance cameras to high-definition quality, enabling its customers to protect against theft or terrorism by providing detailed images that can be used in court or by facial recognition software. The company’s cameras can identify faces and license plates from 46 meters (150 feet) away.
Avigilon has strengthened its infrastructure by acquiring a large building in Vancouver for the company’s new headquarters. And the company has moved into a new manufacturing facility in Texas, which will provide more efficient manufacturing operations and support more than $1 billion in revenue per year.
Avigilon generated $370 million in sales in 2015 and will likely generate $1 billion within five years.
Avigilon boasts a very strong balance sheet with modest debt and ample cash. Management’s accelerated ramp-up in marketing, research, new facilities and employee hiring expenditures will crimp earnings in 2016, but the company’s $65 million in 2016 cash flow is more than sufficient. Small acquisitions will provide new technology and could boost sales and earnings higher than forecast.
The current 15.3 P/E ratio (current price divided by latest EPS) is easily justified by Avigilon’s growth prospects. Earnings per share will likely grow at a 16% pace during the next five years.
The sharp fluctuations in AVO.TO’s stock price are unnerving, but the wide swings provide profitable opportunities for nimble traders. Short-term investors have abandoned the stock because of decelerating earnings growth, but long-term investors believe Avigilon’s extra expenditures will lead to a surge in sales and earnings within the next couple of years.
For longer-term investors, the current low price provides an excellent entry point to buy an exciting company in the rapidly growing surveillance sector. I expect AVO to more than double and reach my Min Sell Price of 32.00 on the Toronto Stock Exchange or 24.50 on the U.S. Over-the-Counter market within two to three years. I recommend that you buy AVO at the current price.
For more updates on this stock and additional value stocks, consider taking a trial subscription to Cabot Benjamin Graham Value Investor. For more details, click here.