Revisiting the Jettisoned

Every once in a while I like to look back at all the stocks I've sold, and see if there's something I missed or might learn from them even if they're no longer in my portfolio (and beat myself up a little if they've gone up since I sold them.

I sold Design Within Reach (DWRI -- click to register for free RT streaming quote) back in December at $5.95. I completely lost faith in the management, and thankfully recognized that I had bought my small position without adequately understanding their problems with production and shipping costs, competition, and self-cannibalization by their various selling vehicles (showrooms, internet, catalog). Today as I type this, the price is below my sale price at about $5.85, but in all honesty I could have held on and sold over $7 if I had waited until January. I would have had to be quick, though, they've just announced that they're delaying their 10-K and good news about DWRI in the near future seems unlikely. I'm still happy to be out of this one.

Cendant (CD) I wanted to shed as soon as they announced their breakup plan, and did sell a few days later at $17.63. Like DWRI, I lost money on this one but could have lost more had I waited longer -- it has dipped to $15 or so and is now at just about $17. Of course, SpaceDev, the company I added to with my Cendant sale money, has lost money too since then. I still have no interest in owning this broken-up conglomerate that's dominated by mid-tier brands (Ramada, Avis, etc.) -- the hope was that these brands could build synergy together, but clearly all management and the investment bankers were interested in was churning the money. Almost all mergers are sold as being about building synergies, and almost all breakups are about releasing value -- both arguments, in most cases, are hard to believe ... most mergers and breakups are about enriching investment bankers and the egos of CEOs. Even if Cendant does trickle up higher if folks buy in to the "unlocking value" argument before the split goes through, I'm not interested. Still happy that I sold this one.

I sold CNET Networks (CNET) and Anglo American UK (AAUK) at about the same time last summer. Both would have probably been better held since they've gone up significantly since I sold. I sold AAUK at $23.44 (now at a split-adjusted $36.50) because I didn't want to maintain such a large holding in a mining collussus that I didn't understand very well, and CNET at $11.98 (it's now at $13,78) on buyout rumors that I thought lifted the stock to overvalued status. I still think both are fine companies and if I had unlimited funds I'd regret that I shed these shares ... but I used that money to diversify internationally into Korea (with the EWY index) and India (with the IFN closed end fund), and both of those have appreciated more than the shares I sold, so on the whole I'm reasonably sanguine about these premature sales.

And one more to note (though there are others -- both good and bad -- that I'll get to in another post) -- I sold New York and Company (NWY) when it started to appear to me that their turnaround story wasn't turning around, or at least not quickly enough for me, and bought Chico's instead. NWY may yet turn around, but they've been on a rollercoaster since I sold them -- I sold at $15.80 and they subsequently dipped to $13 and rose to about $22 at the beginning of this year, before again dipping to the current price of ... just about $15.80 again. I still don't feel like I'm at all confident in NWY's ability to compete against Chico's and the other specialty retailers or the resurgent JC Penney's and their ilk ... this may be another opportunity to buy in with the expectation of the turnaround gaining traction, but I'm not interested in returning to New York at this point.

On the whole, I don't like to sell. I'd rather even ignore a company in my portfolio for a while if I'm frustrated with it, with the assumption that they're more likely to improve than I am to pick a good selling price. But sometimes I need money to put into better ideas, and sometimes I just lose faith in a company's management or in my initial investment thesis and decide to stop being a shareholder. In most of these cases, I still think my decision to sell was reasonable ... though it may have cost me some money, or I may have sold too late or too early. And I may just still be too impatient -- it's possible that my original investment theses for these companies will still play out in the years to come while I watch from the sidelines.

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Tax Loss Selling (DWRI)

Well, I hope I learned the lessons from my cautionary tale regarding Design Within Reach (DWRI -- free real time quote from ADVFN), because it turns out it makes sense for me to clear the DWRI from my portfolio before the end of the year and take the tax loss.

I won't retype my whole experience with this modern furniture retailer -- suffice to say that I like the product, bought a small position early this year because I was enthusiastic about their expansion plans and the quality of the products, and watched as it became one of the bigger investing mistakes in my portfolio.

The reasons for DWRI's fall were legion -- management mistakes, competition that was much stronger than I had anticipated, expensive studio rollouts causing cannibalization of their own higher margin catalog business, and rising costs due to the Euro and fuel/shipping increases.

I don't usually like to sell, but am certainly willing to when a company turns out to be something much different than I initially thought. Even after losing faith in this company, I figured (appropriately, so far) that it had fallen as far as it would likely fall, and I had intended to hold the stock in my portfolio to remind myself of the risks of leaping into a stock too quickly. The tax loss I can harvest right now is too appealing, so I'll just have to trust myself to remember.

So the band-aid has been ripped off and the pain is over -- I sold DWRI today, December 21, at $5.95 for a loss of roughly 68%. Phew.

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Cautionary Tale (DWRI)

Anyone worth his salt can write about his fabulous successes -- but don't the experts always say that we learn more from our mistakes?

It sure appears that Design Within Reach (DWRI) has been my biggest investing mistake in quite some time -- and the worst part is, I should have seen the writing on the wall back when I made my first purchase. If I could have just been a reader of my post about purchasing DWRI instead of the author. I look back at it now and see too much enthusiasm. Too much personal appreciation for the products and the concept, not enough attention paid to the competition, the marketplace, or the financials.

To be fair to myself, all of this is much clearer in hindsight than it was at the time, a mere four or so months ago when I opened my (thankfully small) DWRI position. But if I had been more cautious about making the purchase, I might not have pulled the trigger.

And you know what? I'm not going to sell.

Of course, if I had any significant amount of money invested in DWRI I would sell to free it up -- but I'm looking at a stock that was already down 60%, and has now fallen a further 40% this evening in the crazy after hours trading. After this freefall, it's hardly even worth paying the commissions, even though I would get some satisfaction from drawing a little slash through the DWRI in the top right corner.

I won't even post the chart here -- it's too depressing, it looks like something Alberto Tomba would muscle his way down to win the gold medal in the downhill.

No, unless I have a compelling tax reason to close this position, which I opened up around $18, I'm going to hold onto it and force myself to gaze upon this mistake right up near the top of my portfolio (damn alphabetical order!) and remind myself to think thrice before buying into a newly public company or a company whose product I personally like.

Sure, it's great (and Lynchian) to buy into companies that you have a personal interest in. I find most of my investments interesting, otherwise I might as well buy an index fund. But it's important not to let my personal interest cloud my assessment of the company's prospects.

And the other reason I'm keeping DWRI as a cautionary tale is that I need to remind myself to buy in bites -- not to try to swallow a full position in a company during my first enthusiasm at finding and researching what looks like a quality investment. With DWRI I thankfully followed that rule and bought just a partial position, and things went quickly downhill as it became clear I was wrong about the business so I never re-upped. Phew.

I'm still not sure what went wrong with the DWRI business plan -- I think it's a combination of a lot of things. Maybe the marketplace wasn't as big as I thought, and I definitely underestimated the amount of competition -- not just from other big companies, but from niche local retailers, Design Within Reach is surrounded by high-end designer shops at the top, Crate and Barrel and Ikea at the bottom, and lots of other contemporary furniture sellers that are online or otherwise trying to build a national presence. I think they have an advantage over some of them, but clearly it's not enough of one or they're doing something else dramatically wrong. They even seem be be cannibalizing themselves, as their dramatic growth in showrooms has coincided with significant slowing in growth of higher margin online and catalog sales.

Their company line is that the online and catalog presence is a marketing cost, and the showrooms are the real focus -- I'm not sure I think that's a great idea. The rapid showroom buildout has been quite expensive and is expected to continue for some time -- at least, unless this beating from the stock market causes them to change their plans.

Maybe it's just poor source planning or bad luck -- they're dependent on European manufacturers, so the weak dollar was a problem and then the costs of shipping became a problem with high fuel prices.

But here's where I stop -- I should have taken the risks more seriously, and, as I've learned more over the last month or so, and especially with the disastrous earnings and guidance issued today, I was just plain wrong about this business and management. I've been wrong plenty of times before (see WOLF for the second-worst example), and I'll be wrong some more, but hopefully for different reasons.

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Portfolio change -- DWRI bought July 7, 2005 at $18.02.

This was a purchase made using some cash I had available, haven't sold anything to buy this one.

The brief argument? I hadn't realized Design Within Reach was a public company until I saw a Motley Fool article on them a week or so ago, and a quick perusal of their investor information made me want to open a small position as I research more.

DWR provides high quality, signature modern designer furniture at fairly reasonable prices (they target the top 10% of furniture buyers, so it's not that reasonable for all of us). They sell furniture designed by most of the big names in modern design -- Eames, Gehry, Le Corbusier, Starck, etc., and for many of these designers and their iconic designs they are by far the easiest and most affordable place to purchase (for some they are the only place -- about 20% of their designs are exlusive to DWR).

While the furniture is not cheap, it is reasonable when compared to other high quality furniture, and modern interior design is a very hot niche right now as far as I can tell -- shaping the offerings of Target, Pottery Barn and Crate and Barrel as well as the high end furniture companies. And the DWR experience is great, by all accounts -- they sell through the web catalogs, and their own galleries where you can try things out, and all furniture is delivered from their warehouses in Kentucky (or straight from the manufacturer) within a very short time. Virtually everything is perpetually in stock, thanks to a relatively small inventory of about 700 items. They are currently debt-free for all intents and purposes, and they are using their tremendous cash flow and IPO funding, and a credit line as well, to expand their galleries very quickly -- they have spots in some of the hippest (and most lucrative) areas in the country already, but at only about 50 studios today they have lots of room to expand.

Sales in studios (including the growth of new studios, which more than doubled) over the past year were up 92%, and direct sales grew at 24% (with web orders growing twice that fast). Studio growth is going to continue at a rapid pace, and their catalog distribution is expected to be ramped up as well. I see lots of growth ahead for this company, and even while they're in this hyper growth stage they're already making money -- they're guiding for .51 this year, which would put them at a high but reasonable PE of 35 or so for a fast-growing company (and I wouldn't be surprised to see them blow through these estimates).

There are definitely some risks, and we've seen some other furniture companies get clobbered this year (Hooker and the like), but I think this upper tier design-conscious retailing, with lots of flexibility and a consumer friendly experience (you can buy at our store, or online or via phone, and you don't have to carry it home -- everything's shipped right to your house) is a great idea and will continue to prove to be a great business going forward. I'll write more about this one as I have time and as I flesh out what is currently a very small position. And maybe someday I'll be able to buy a nice Le Corbusier lounge chair.

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