I make the difficult decision to sell Urban Outfitters as I try to adjust the portfolio to best take advantage of this new investment environment.
Take The Money And Run
Discretion is the better part of valour. Live to fight another day. A bird in the hand is worth two in the bush. He who sells his Urban Outfitters stock today has money to pay for his son’s university education tomorrow. While not as well known as the first three sayings, that last one is more directly applicable to my own situation. I sold my Urban Outfitters stock this morning.
It wasn’t an easy decision. Urban Outfitters has a lot going for it. They responded quickly to this crisis and were one of the first retailers to announce widespread store closures. They have a long history of profitability behind them and have been cautious and restrained in their physical expansion while at the same time have made great strides in building up their e-commerce business. They entered this downturn with cash in the bank and no net debt. Really my only knock against them is that they are in the unfortunate position of being in the retail industry. That, and they don’t appear to be quite as cheap as my other retail holdings. Unfortunately, this was enough to persuade me to give them the boot.
At the current price of $14.40, the stock has a p:e of around 7 to last year’s earnings. A month ago that price would have made it a screaming buy. But the world we live in has changed. As investors, we’re all making wild guesses at this point as to what the future might look like. My guess is that we’re not going to see a quick V-shaped recovery from this crisis. I think there are going to be a lot of lingering effects that keep things subdued for a while. Some industries are going to be hit particularly hard and retail is one of those. I’m expecting it to wake up from this bad dream with a really nasty hangover.
Meaning that a p:e of 7 on last year’s “peak” earnings might not be that far off fair value in this brave new world we live in. The average small cap stock is now trading at a p:e of 12. In that environment, I would peg the fair value of a promising turnaround situation at roughly 8 times peak earnings. While I could be wrong about this, I suspect most of traditional brick and mortar retail is going to look like a giant turnaround situation in a few months.
I’ve been gradually adjusting the portfolio over the last two weeks to better reflect some of these harsh new realities. I’m trying to add a wee bit more of a defensive character to my holdings and trying to lighten up on some of the stocks or sectors that I think could be in for a rougher ride. But I’m also trying not to get too caught up in the doom and gloom and I want to make sure that I have more than my fair share of some of the pretty spectacular bargains that appear to be out there. (Many of which are already in my portfolio.) The world won’t be in lockdown forever. It’s a delicate balancing act.
The sale of Urban Outfitters was part of my ongoing attempt to walk this fine line. I’m starting in on a review of the year end results for the American market this week and perhaps I can find a worthwhile replacement for this stock. If not, there’s an academic institution that has dibs on at least some of that money.
Full Disclosure: I do not own shares in Urban Outfitters.