Polypore International (PPO) has staged a gradual but solid recovery from its August 28 closing low at $31.39 to $36.39 today. Despite that 16% gain, I’m still looking at a 30.5% loss since I added the stock to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ on January 13, 2012.
So why sell the stock out of that portfolio today? Why not wait until the gradual upward trend reduces my losses even further?
It’s never a good idea to let a desire to “get back to even” drive your investment decisions. In this case I think the key points in making this decision should be 1) how long it would take Polypore to get back to even or better—in other words what’s my likely return over what period if I continue to hold—and 2) how does that compare to the potential returns I could earn from other opportunities in the current market?
I think Polypore’s October 29 report of third quarter earnings supports a decision to sell. The company earned 37 cents a share, beating the Wall Street consensus by 3 cents a share. Revenue dropped, however, by 6.6% from the third quarter of 2011, although they came in, at $177.6 million, above the analyst forecast of $174.22 million.
But it’s the company’s guidance that really struck me. I’ve rarely heard such caution from a company that was still optimistic about its long term potential. The fourth quarter will be better than the third, the company said, but management still adjusted guidance to the low end of the 50 cents to 60 cents range that it had projected earlier. (The analyst consensus for the quarter was at 56 cents a share.) In the company’s very important electric vehicle market, the best the company offered was a belief that certain production facilities anticipated by its customers to start up late in the fourth quarter would indeed start up on schedule. In other words Polypore won’t see any improvement in its revenue for separators for batteries in electric vehicles in the fourth quarter even if the projected factories do go on line. And they might not go into production as anticipated.
Other business lines got equally cautious good news. Healthcare customers in Italy resumed production at the end of the third quarter—great but that’s not the same as projecting actual growth from pre-euro-debt-crisis trends. In its business of making separators for batteries in the consumer electronics market the best the company could say was that it expected “no further weakening of the consumer electronics market due to macroeconomic factors.”
Still without the near correction in the overall market—the Standard & Poor’s 500 stock index is down 8.3% from the September 14 high to the close on November 15—I’d probably be willing to hold on to Polypore with great patience until the electric vehicle and consumer electronics markets recover enough to restore the company to a growth track.
But as I wrote in my post “Volatile enough for ya?” http://jubakpicks.com/2012/11/16/volatile-enough-for-ya-what-to-buy-and-sell-as-the-market-vibrates-between-fear-and-hope/ the near correction so far and the volatility yet to come on the euro debt crisis, uncertainty about growth rates in China, and the U.S. fiscal cliff will, during the remainder of the year, create very attractive buying opportunities in stocks that have the potential to show serious gains in the first half of 2013. In contrast, I think the potential gains in Polypore are much further down the road. Looking at continuing to own Polypore in terms of opportunity costs, I just think that there will be better places to put the money I realize from this sale to work.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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