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Saturday, July 23, 2016

Inherent Risks

I was very busy yesterday, so I'll have to write this today.

Before anything is said, an important thing that needs to get across is the fact that I knew what I was getting into when I selected an individual company to invest a portion of my portfolio into. With positions like these, one is exposed to multiple tiers of risk. Instead of only being involved with overall market risk and/or sector risk through mutual funds and ETFs, I would have to deal with individual company risk as well. "Picking" a stock inherently is more risky, and making sure that the value of the position sizes dedicated to an individual stock compared to that of the entire portfolio is relatively small is necessary for proper risk management.

Now, how does this all relate to that of my situation? Where does this apply to me?

Skechers had an earnings report Thursday, yesterday night, after the market closed, and I kept holding it by market close of that day before the release came out for 2 main reasons:
  1. I had already clearly identified my holding period; I am not interested in selling prematurely.
  2. To try and predict and anticipate earnings releases is literally gambling; the company could very well have exceeded expectations today as well. I am not interested in trying to time the stock.
I guess unluckily, they did release an earnings disappointment. The company released a negative surprise of just under 6% in their EPS, and noted how higher expenses hurt their margins, as well as how fluctuations in forex prices (probably Brexit) negatively affected their bottom line. Their domestic wholesale business had a decline of around 5.4%. But I think that the most notable thing to consider is the history of their earnings reports. In the past four quarters they have either met or exceeded expectations. In Q2 2015 especially, they blew them away. There was likely the trend of this continuing that was heavily factored into the share price, and this recent quarter may have really let some hopeful people down.

Nonetheless, the stock dropped around 15% after-hours after the release came out, and dropped another 7% just right after the market opened today. It rose 0.8% after hours. That's a pretty significant fall. And although I believe overwhelmingly in the idea that these markets are pretty efficient in giving a relatively fair value at just about all times, let's just say I still have strong conviction in the longer term prospects of this company. They still increased gross profit by 11% YOY, increased their margins, and have an ever-increasing international presence with their stores, which for me is one of the main keys to the next chapter of this company's growth potential. I'm hoping it will be another Krispy Kreme.

I was thinking of averaging down and selling off some of my positions in my broader ETFs to increase my position in Skechers, but I really didn't want to mess with my underlying allocation percentages, so I did not and probably won't. However, I do not plan on cutting off the position anytime soon. 

But all in all, although this is a pretty significant drop in terms of the company's share price itself, because I don't have a large position in it currently, and this really is the only considerably "speculative" position I own, I'm not too hurt. Again, I have already clearly defined the holding period for this stock and have no interest in trying to trade it for short-term periods. The stock could very well trend downwards for a period of time, but it still wouldn't really be that big of an issue for me.

On another note, I mentioned before in a past entry that the Brexit was on everyone's minds, and that the markets were in a serious fear over impending collapse with it as the catalyst. Well, just 2 days ago, before this quarterly earnings report came out, Skechers was trading at a value even higher than it was just pre-Brexit. The major indices such as the S&P500 and the DJIA have already recovered their losses and more. Although I still think the Brexit still is a serious issue that will have significant repercussions on Britain's economy especially, I think it's fair to say that all of that talk of "imminent destruction" and "sell while you can" was definitely a bit overblown.

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