The Importance Of Diversification

The Importance of Diversification

This has been a very interesting month for my US portion. The last two weeks of October were filled with numerous earnings releases for Q3. For some, it seems the market was desperately waiting for a good reason to sell and cash some profit. This is how two of my holdings lost roughly $1,500 combined (Hasbro (HAS) -18% and Texas Instruments (TXN) -8%). This is a steep drop for such a small period. Most of the drop happened on earnings day:

(Click on image to enlarge)

Source: Ycharts

The Joy of Diversification

On a ~150K portfolio, a 1.5K drop represents only 1% of the portfolio value. Therefore, while two of my companies are getting killed by the market, I barely felt a breeze on my face. In fact, I didn’t even notice as I had other companies in other sectors that did the opposite trick (e.g. beating analysts estimates and issuing stronger guidance). Stock like Apple (AAPL) +16.28%, BlackRock (BLK) + 13.01%, Lazard (LAZ) +9.13% and Gentex (GNTX) +8.54% all had great quarters. Instead of losing $1,500 in October, I show a portfolio value increase of nearly $1,500.

A great diversification allowed me to not suffer from bad news coming from a few companies. This doesn’t mean I should ignore what happened to both Hasbro and Texas Instruments. In fact, I review each of my holdings quarterly by reading their latest earnings statement.

Here’s what I wrote to my DSR members in our weekly newsletter about these black sheep:

Texas Instruments – A Classic Miscalculation

If you can remember what happened 3 months ago, you would probably smile seeing TXN dropping like a rock this week. The exact opposite happened for both TXN and HAS during their Q2 earnings day:

(Click on image to enlarge)

Source: Ycharts

When I talk about noise… What really happened?

First, TXN’s results have been bad for about a year now. Texas Instruments is facing many headwinds at the same time. We are at the end of an investing cycle in technology, the trade war is affecting business with China (duh!) and the automotive industry is also in a slowdown (hence, less high-tech cars are being sold).

Second, we thought we were done with bad news last quarter… And management slapped investors in the face by decreasing their Q4 forecasts… missing analysts’ expectations once again. Q4 forecast sees revenue of $3.07-3.33B (consensus: $3.6B) and EPS of $0.91-1.09 (consensus: $1.28).

Third, we don’t see the end of that trade war. Uncertainties are the worst thing (and the best thing) that could happen to a stock. It’s the worst for current shareholders as it is hard to price a stock when the future remains unclear. However, it’s a great opportunity if you missed the train, and you want to add TXN to your portfolio.

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