I Invested on Thursday and Lost $352 on Friday

..but I’m not worried.

I recently published an analysis of Magna International, and concluded that the stock was very undervalued, to the tune of 26%. Following my own advice, I picked up 100 shares in my Tax Free Savings Account on Thursday February 23, 2017. Following that, on Friday February 24, 2017 the TSX composite was down 1.57%, its biggest drop in 5 months. I had picked up Magna for an average cost per share of C$59.95 including commissions, and on Friday it had closed at C$56.43/share, a 5.87% drop in a single day; this equating to a C$352 cash loss in 24 hours.

At the same time, Magna announced its fiscal 2016 results, some highlights of which include:

  • Record 2016 sales up 13%, well above 4% growth in global light vehicle production
  • Record 2016 diluted earnings per share from operations increased 9%
  • Record 2016 cash generated from operating activities of $3.4 billion, up 45%
  • Returned $1.3 billion to shareholders in 2016

To sweeten the news, the dividend was hiked to U$0.275/share, up from U$0.25/share, a 10% increase.

To sum things up:

  • The market dropped 1.57% in a single day
  • My investment lost 5.87% in a single day
  • Magna had a record year
  • Magna increased its dividend 10%

Days like this only go to emphasise the importance of a long-term view. The market will always go up and down, and there is really no way to time things out (I’ll ignore the technicians in the audience). If I had a crystal ball, I would have waited 24 hours before pulling the trigger on my trade, and by now I would have been up 2.23% week-over-week, instead of down 1.54% week-over-week. Alas, I’m a Dividend Gangster, not a Dividend Clairvoyant. My original investment thesis stated that:

  • Magna had a strong dividend history (26.97% CAGR over the past 6 years, when measured in USD Dollars. When measured in CAD dollars the dividend is a little wonkier (in the favour of Canadians) as it has to take into account currency fluctuations)
  • Magna was undervalued to the tune of 26%

With the 10% increase, Magna is continuing to maintain the course of a strong dividend player. Even though the price dropped (like a rock!), it is still undervalued, and still has plenty of upside before reaching its Graham number.

Now, a novice investor might have panicked on the Friday when the market dropped, and sold off on the Monday. Let’s take a look at the stock performance over the past few days, and see where we’ve landed:

Date Price (CAD$) Gain (Loss) for the Day Gain (Loss) Since February 23
2017-02-23 $59.20
2017-02-24 $56.43 (4.68%) (4.68%)
2017-02-27 $57.18 1.33% (3.41%)
2017-02-28 $56.79 (0.68%) (4.07%)
2017-03-01 $58.00 2.13% (2.03%)
2017-03-02 $57.86 (0.24%) (2.26%)
2017-03-03 $58.06 0.35% (1.93%)

If a novice had sold immediately after the drop on Feb 24 (i.e. they sold on Monday Feb 27), they would have lost 3.41%, or $2.02. If they had held until today (Mar 3), they would only be down 1.93% or $1.14. How would they know when to sell? How would they know why to sell? The short answer is: they wouldn’t! And that is what differentiates an investor from a trader. The former does not panic at the drop in price in the short term. Guess what happened between February 23, 2017, and February 24, 2017?

  • The price dropped 4.68%
  • EPS rose 12.02%
  • Book value rose 7.19%
  • The dividend rose 10.00%
  • The dividend payout ratio increased from 17.23% to 17.82%

So except for the dividend payout ratio, some of the key per share metrics improved, and the price dropped. If the EPS went up, and the dividend went up, and the book value went up, and the share price went down, that screams “buying opportunity”! However, the general trend of the market on that one day pushed most stock prices down, including Magna. If anything, I wish I had some additional capital kicking around: I would have doubled down on my position in a heartbeat.

As investors, more importantly, as dividend investors, we have to keep our eye on our 3-year, 5-year, 10-year, and 20-year goals… A minor blip in stock price shouldn’t shake us, it should drive us to invest more of our capital. The classic quote from Baron Rothschild is to “[b]uy when there’s blood on the streets, even if the blood is your own.” Now, I didn’t have blood of my own that day (because I was investing in my TFSA, if I had leveraged my line of credit, the interest to purchase the stocks would not be tax-deductible)… But nonetheless, while a market downturn is bloody, but it is also an opportunity.

Onwards and Upwards!

Notes

  • Fundamental figures are in US currency
  • Share prices are in Canadian currency
  • My ACB was C$59.95, which was based on an intra-day price; the values listed in the historic pricing table are the CAD close price


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