January 14, 2009

Sold LOW for better bargains

I have sold Lowe's (LOW) @ $23, which accounts for %3.56 return not counting dividends. I have sold for the simple reason: I need the capital to allocate to investment opportunities that are becoming available at this time. When I made the LOW purchase, it was my best idea and now there are so many more compelling ideas that I think it is better to reallocate capital. I have limited US funds in my portfolio and I do not want to exchange additional cash so I will have to reallocate some of my capital to what I see as better businesses.

I still think LOW is an excellent company with great management. I think LOW will take market share from Home Depot and it can do it cheaply now. LOW is still expanding its store count in the US and Canada and it is doing so on the cheap in these times where retail space is plentiful and cheap. The one thing that hindered LOW in the past is the convenience of its locations compared to Home Depot, which have saturated the market and can't expand any further.

I think the valuation case for LOW is still somewhat intact, albeit the intrinsic value have gone down due to lower valuation of its real estate and reduced margins. Margins and sales will have to compress in the future compared to margins during the housing bubble years. Still the company trades at discount to intrinsic value.

Additional reasons for the sell decision:
  • Housing do not seem to be turning around soon. Foreclosures Inflating Housing Turnover - September housing turnover rose to (-3.6)%, up from (-13.5)% in August, driven largely by sales of foreclosed properties.
  • Retail as a business is an arbitrage play where the advantage is never lasting. Take a look at Walmart and other big chain stores offering to sell hardware and home improvement supplies.
  • I want to shift my portfolio away from large corporation to small to med size cap businesses where I have some information advantage.
  • The United States is in the early stages of a structural shift in which slower consumer spending will dramatically reduce its impact on gross domestic product. The consumption sector will decline from 2/3 of GDP to lower levels. Growth in consumer spending over the next several years will be about 1 to 1 1/2 percentage points less than the 3.5 percent clip during the decade ending 2007.

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