I sold our last stock today

[Matt]

I sold our final stock. The holding I had was in HCP, and I’ve been a big fan of this position for many years, but I realized it was time to reallocate for several reasons.

HCP is a Real Estate Investment Trust (REIT) focused on the healthcare industry. I really like this conceptually as looking forward I see a strong demand for the type of properties that they work with: senior housing, skilled nursing facilities, hospitals, medical offices etc.

Additionally, REITs in general are good income investments. In order to be granted special taxation status with the IRS they must promise to pay out at least 90% of taxable income as dividends annually. I personally like to shove these into retirement accounts and use a Dividend Reinvestment Program (DRIP) to automatically buy new shares (without a fee) with my dividend payment.

Within REITs, HCP is a a S&P 500 Dividend Aristocrat, a title bestowed on it for a 30 year performance of dividend increases. It currently yields 5.3% annually.

So…it sounds like a pretty good company and you may be wondering why I got out now? The truth is, it is still an attractive proposition in many ways. Frankly, I don’t have too many concerns about it for the future.

My view on investing


You need to consider an investment in a single company as incredibly high risk, and as you should know by now, risk must have reward priced into it in order to be a savvy investment decision. The reward of HCP is the yield – 5.3%… which is quite attractive. But the risk can be seen on the chart below:

HCP (in Blue) vs the S&P 500 (in Red)

As you can see, HCP is outperforming the S&P 500 until, well… it doesn’t anymore. At the beginning of February over a couple of days, it declines from a high of $47.97 to a low of $42.88. If you look at the macro-economic events for this period, nothing notably changed. This means that the decline that occurred was through unsystematic risk.

Essentially something happened to the company itself, a micro economic event. I looked around for ’news’ and I couldn’t find much to explain this drop. There was some muttering about the price being expensive compared to alternative companies, but nothing really solid.

The final push?


Typically, the events surrounding HCP would not be enough for me to bail on them. Note that this event happened a month ago, so it isn’t a knee jerk reaction to losing money.

Overexposure to real estate


As home owners we are already invested in the real estate market. While HCP may seem very different, there is correlation on a rate level. IE if rates rise borrowing will cost more which will impact marketability of our home, and the cost of borrowing for HCP increases, reducing profitability, also impacting its marketability.

While I do not predict immediate rate hikes, there is just not enough incentive for me to ‘hope’ it doesn’t happen. Remember risk must be offset with reward.

Conclusion


I do not believe in a one size fits all approach to investing. Holding individual stocks, including HCP can be a wise move for many investors. My own needs change based upon analysis of my overall asset allocation, including personal residence, and plans for business growth.

I do believe the core of any investment strategy should be a broad, well diversified asset allocation using low cost ETFs or Index Funds, sectors should account for economic cycle and personal exposure. Single stocks should be speculative in nature and considered very high risk. High risk is OK, providing that it is priced accordingly.


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[RRD]

Hmm, IMO interest rate hikes are not happening anytime soon, not in the next 2-3 years. I have held SBRA, another health care REIT which has had exceptional growth the last five years, plus a 5% yield. This one has held me in very good stead and time will tell what it does in the future - I have a high appetite for risk if the reward is favorable.

 

[Matt]

Hmm, IMO interest rate hikes are not happening anytime soon, not in the next 2-3 years. I have held SBRA, another health care REIT which has had exceptional growth the last five years, plus a 5% yield. This one has held me in very good stead and time will tell what it does in the future - I have a high appetite for risk if the reward is favorable.

Will they call you to tell you when HCP hires the SBRA top sales person away from them and that person has a relationship in place to close the next major deal?

I'm all for the notion of the sector, healthcare REITs are interesting.. but what makes one better than another, and how does holding one and not the other increase your risk of something happening to that company and impacting share price?

I agree with you about rate hikes, but it doesn't matter. We can 'guess' it is unlikely to happen, but the reward for me is insufficient for the small chance that it might. This is specific to my own financial situation and recently buying a house for cash.

 

[RRD]

Will they call you to tell you when HCP hires the SBRA top sales person away from them and that person has a relationship in place to close the next major deal?

By that token, you could never buy any individual stock and I guess that is what you are aiming for, but in this over-bought market individual stocks are where the big the returns are at. I am not against indexing but one tends to buy the same stocks again and again without realizing it, in multiple index funds. Also, the time to risk big is when one is young. I have a bunch of stocks which have been multi-baggers in the past (due to adequate DD on my part) and I own a few more of those, though that is only 20% of my portfolio. Just a differing POV.

 

[Hanaleiradio]

Thought provoking post--Thanks! IMHO, correlation is the hardest thing to nail. Until reading your post I hadn't thought about home investment possibly being correlated to healthcare REITS, or other parts of the broader real estate market, on the level of rates. But there is logic there. Need to noodle on that.

BTW, the chart on HCP is really ugly. It might be trying to put in a bottom now, but could very well keep on falling. Stocks with that chart pattern rarely bounce back quickly. Its a really good case study on the dangers of single stock investing. Stuff happens that the big boys learn about but never makes the trade press until weeks later. If you're good at reading charts you can see it and protect yourself, but very few people have the time or interest to get good, and to stay on top of the charts.

 

[Matt]

By that token, you could never buy any individual stock and I guess that is what you are aiming for, but in this over-bought market individual stocks are where the big the returns are at. I am not against indexing but one tends to buy the same stocks again and again without realizing it, in multiple index funds. Also, the time to risk big is when one is young. I have a bunch of stocks which have been multi-baggers in the past (due to adequate DD on my part) and I own a few more of those, though that is only 20% of my portfolio. Just a differing POV.

I think, fundamentally, there is a problem in looking for multi baggers and big returns.

 

[Matt]

Really rough day for dividend paying stocks today... REITs got hammered, as did utilities. I didn't mention in my original post but I also sold out of FCOM when I sold HCP. I do plan to get back in, but I will be taking a little time to consider the best options, and in the interim will watch the Vol.

 

[Hanaleiradio]

As did oil! Solid support for HCP around 39/40. If it breaks through that its likely to test 52 wk low from a year ago (36). I opened a bear spread at yesterday's close thinking its going to test the low. Trendline and most technicals are really ugly. Only positive thing is that the recent selloff has been on lower volume than one usually sees with such a big swing. Of course, that also means there are plenty of those left who have yet to throw in the towell!

 

[Matt]

As did oil! Solid support for HCP around 39/40. If it breaks through that its likely to test 52 wk low from a year ago (36). I opened a bear spread at yesterday's close thinking its going to test the low. Trendline and most technicals are really ugly. Only positive thing is that the recent selloff has been on lower volume than one usually sees with such a big swing. Of course, that also means there are plenty of those left who have yet to throw in the towell!

My plan is (hasn't changed) to go back in with some small caps fund, but I will wait a day or two to see how many people panic before doing so.

 

[Matt]

Back in for the full amount of HCP+FCOM today for SCHA. Small Cap, low cost ETF from Schwab.

Note this isn't investment advice, as the transaction is particular to my own overall asset allocation, risk tolerance and needs.

 

[RRD]

Maybe you'd want to look into Vanguard's mid-cap ETF as well (VO) - has had a terrific chart for the last five years.

 

[Matt]

Maybe you'd want to look into Vanguard's mid-cap ETF as well (VO) - has had a terrific chart for the last five years.

Its a completely different investment though...

 

[RRD]

Its a completely different investment though...

Yes, I know that but it is one of the better ETFs out there and you seem to be going for those, and hence the suggestion.

 

[Matt]

Yes, I know that but it is one of the better ETFs out there and you seem to be going for those, and hence the suggestion.

Thanks for the suggestion..to elaborate a little as this is an important topic:

You cannot compare an ETF that is a small cap with a mid cap.

You can only compare an ETF that is a small cap with a small cap - then you can dive into it and look at things like Expense Ratio, Beta, Treynor, etc. You can find the most efficient example of a small cap ETF and then, once you have it, you can plug it into a portfolio that fits.

For example.. if I owned already 30% of my portfolio in this VO ETF - the VO ETF would be a bad investment because of overall portfolio diversity. That is regardless of its 5 year performance. We should also note that any broad index ETF will have very good 5 year performance, it doesn't necessarily mean that VO is the best Mid Cap ETF (though I haven't checked and cannot tell you).

I bring this up here as I have recently been pondering about stock picking (which is the same as ETF picking in some regards) and how it is such a subjective matter. Someone asked me how I selected a stock, and the answer would be 'it depends on your own income, career path, other investments etc...' EG some might love Apple stock... but if you work there you shouldn't be invested in it outside of ISO/NSO grants.

Hope that didn't come across as confrontational - just wanted to explain my logic on the subject a bit more.

 

[RRD]

Points well taken though I was not comparing a small cap ETF with a mid-cap one. The suggestion was because you don't want to invest in individual stocks and here is a great index fund which has beaten the SPY very handsomely in the same time period and has an expense ratio of 0.09% along with other pluses.

I really didn't get what you are saying regarding diversity. Everyone knows diversity is the key ingredient in any portfolio. The suggestion to buy VO is for someone who is not already invested in mid-cap funds.

 

[Matt]

really didn't get what you are saying regarding diversity. Everyone knows diversity is the key ingredient in any portfolio. The suggestion to buy VO is for someone who is not already invested in mid-cap funds.

My point was you don't know what I'm invested in already

 

[JoeK]

Share price volatility doesn't necessarily equate to risk. REITs are getting hammered now, yes, but there isn't really any fundamental change from a business perspective. I just see it as an opportunity to buy more cheaply priced shares at a bargain price when things like this happen.

As long as the business model is still sound and the earnings continue to rise, there is no need to be concerned with a temporary drop in share price.

 

[Matt]

Share price volatility doesn't necessarily equate to risk. REITs are getting hammered now, yes, but there isn't really any fundamental change from a business perspective. I just see it as an opportunity to buy more cheaply priced shares at a bargain price when things like this happen.

As long as the business model is still sound and the earnings continue to rise, there is no need to be concerned with a temporary drop in share price.

I'd argue that vol is related to risk. But in this case the reason for the sale was diversification, which is a risk that can be managed. The market does also feel some pressure at this time from interest rates which is another strike against REITs.

 

[JoeK]

I'd argue that vol is related to risk.

The market does also feel some pressure at this time from interest rates which is another strike against REITs.

I would say that earnings (or FFO in the case of REITs) are a much better indicator of risk. If a company's earnings over time are consistently increasing then it's safe to say the risk level is not as high compared to a company whose earnings are unreliable or fluctuate significantly.

I haven't researched HCP in depth, so I don't know their earnings history, but their history of dividend increases is a pretty good indicator that they have solid, reliable earnings/FFO that is not at risk. Day to day market fluctuations mean very little for a company like this. The fact that they have taken a short term hit in share price says nothing about the viability of the company's earnings or where they will be in, say, 10-15 years from now (assuming you are investing on a long term horizon).

In fact, again assuming you're looking at the long term, times like now when the market for REITs takes a hit are the ideal times to invest in them. I guess if you're a trader this doesn't apply, but from your posts I don't think that you are looking for short term trades. Nothing in the recent market movement has given me any reason to think a company like HCP (or OHI, which I am invested in and is very similar in profile to HCP) will yield anything but positive returns and a steadily increasing dividend over the next 20+ years - the fundamentals are unchanged.

 

[Matt]

I would say that earnings (or FFO in the case of REITs) are a much better indicator of risk. If a company's earnings over time are consistently increasing then it's safe to say the risk level is not as high compared to a company whose earnings are unreliable or fluctuate significantly.

I haven't researched HCP in depth, so I don't know their earnings history, but their history of dividend increases is a pretty good indicator that they have solid, reliable earnings/FFO that is not at risk. Day to day market fluctuations mean very little for a company like this. The fact that they have taken a short term hit in share price says nothing about the viability of the company's earnings or where they will be in, say, 10-15 years from now (assuming you are investing on a long term horizon).

In fact, again assuming you're looking at the long term, times like now when the market for REITs takes a hit are the ideal times to invest in them. I guess if you're a trader this doesn't apply, but from your posts I don't think that you are looking for short term trades. Nothing in the recent market movement has given me any reason to think a company like HCP (or OHI, which I am invested in and is very similar in profile to HCP) will yield anything but positive returns and a steadily increasing dividend over the next 20+ years - the fundamentals are unchanged.

Very good points.

As I mentioned in my original post on this, I do still think that HCP is a great company. However, no one company can be great without taking on risk in the form of (lack of) diversification. I have a friend who told me once that their family only invests in XOM, theory being that it was a good company, and so large that it would offer the same protections of a Fund (and that it was in every fund) however, it is down from a high of almost $105 to $84 this year.

Here is it compared to the S&P500 for the past year

On one level, you can say that XOM is a great company. On another you can see it as being more risky than the S&P500 because it is exposed so much to the underlying oil prices.

The same can be said for HCP, it is a great company, but it has its own sector risk in the form of rates for its borrowing.

In addition to the sector risk, there is much more chance of a rogue employee/ scandal being able rock the underlying price of your shares in a single company. For example, in October 2013 HCP shares dropped 4.7% because they fired their President. http://www.bloomberg.com/news/articles/2013-10-03/hcp-names-jones-lang-s-martin-ceo-as-flaherty-is-fired The S&P wasn't rocked on that day just because HCP's president was fired, but HCP was..

Big picture - I think people should hold this stock if they can afford it, and I don't think I can right now. I do not believe in getting rich from stock picking, I believe in getting rich from my own effort, and using an investment to help propel that wealth forward.

As I move forward to launch at least one new business this year (my most expensive venture to date) I believe I have no spare cash flow for a 'repair ratio'. So at times like this I strip out this 'unnecessary risk' from my portfolio, batten down the hatches and focus on making the next thing work. When the business gets through its infancy and becomes a success, I'll be able to have the liberty of stock picking for a bit of upside fun.

So, the reason I sold is that it is unreasonably risky for me to hold when I need DCA money for other projects.