Recent Sell – Magna International

Magna International

Another sale from my portfolio. Regular readers may be aware that I have been liquidating a lot of my portfolio as this market enters the nosebleed section. Valuations are at all-time highs and the world of finance looks just as dangerous as last decade, if not worse. I am of the opinion that holding large positions of cash going into the next crisis is a better strategy than trying to stay invested and trying to squeeze out an extra 1% or 2% in dividends or capital gains.

I sold 50 shares in Magna International Inc (MG.TO) @ C$57.00 and closed my position.

Recent Sell Decision

  • I have been selling for a variety of reasons — including market valuations, herd mentality from other investors, simplicity focus I desire and SWAN reasons. I have detailed all these thoughts in this post.
  • There is much wrong with the economy and the auto sector is stretched (see data here). Auto sales have peaked and consumers are tapped out with massive subprime loans on the books. In addition, consumers keep buying with longer loans that they can barely afford. Auto sector is probably right up there as a cause for concern with the US student loan debacle.
  • More importantly, this particular stock has been a dog in my portfolio. I spent a lot of time over a period of months pouring over the financials, analyst takes, everything seemed good — a little too good. For the life of me, I couldn’t figure out the bear case except broad economic conditions which apply to all companies. It appeared that this was a severely undervalued company that was bound to rise. Finally I was able to figure why it was languishing. The company has invented its own way of reporting earnings. We all know that most companies these days are reporting fake earnings by discarding GAAP measures by simply calling them “adjusted earnings”. The non-GAAP numbers are OK for one-time measures where companies would use large amounts of cash for M&A activity or some other form of investment, which skew the numbers during one quarterly report. But as a sign of the times, most companies these days have resorted to this measure every quarter and started massaging these numbers in order to appear stronger than they are financially. Magna International takes it one step further by also massaging the EBITDA and using an adjusted EBIT instead. The following article from The Globe And Mail summarizes the issue.

globemail-mga

  • My rule # 1 is to understand what I am investing in. While I understand the business itself and really like it, its the accounting and financial aspect of the company that I do not completely understand. With my limited knowledge, this simply stinks of shady practice to me. Perhaps its not. But when a company discards standard accounting practices and invents its own methods, thats a huge red flag for me.
  • I have no patience for this as I try to evaluate business profitability. I have been fortunate that I haven’t been burnt already by holding this stock. Good riddance from my portfolio holdings.

Overall loss (including dividends during holding period of approx 2 years): -1.94%

8 thoughts on “Recent Sell – Magna International

  1. Oh no. I added more shares a few weeks ago. We’re going different directions on this stock. I hear you on the state of the market. Things appear to be cooling off finally. The winds of change have really helped me make money selling calls and puts.

    • Hi IH,
      I noticed that you bought some Magna a few weeks ago…its a company that I have kept an eye on and tried to figure out why its stuck in neutral for months. Its something that I dont understand on the accounting standard used, so I am bailing out here.

      R2R

  2. Hi, didn’t you just buy this position a few weeks ago? They don’t seem that overvalued to me compared to some of the other companies.

  3. Okay let me preface this comment with the following statement:

    It’s called PERSONAL finance for a reason. You can do whatever you want, and you’re totally entitled to your opinions. It’s your stock; you’re allowed to sell it for whatever reason you want.

    But come on…management reporting adjusted metrics in their earnings discussions is not “the reason the company was languishing” assuming that it’s actually “languishing”.

    Accounting practices, generally accepted or otherwise, are inherently exercises in financial abstraction.

    The idea that one method of accounting is “reporting fake earnings”, while another method is pure and holy and true simply because it meets an arbitrary non-industry-specific standard is naive and short sighted.

    Does this mean you’ll be exiting your position in OHI? As a REIT, they emphasize FFO and AFFO (both non-GAAP metrics) because the GAAP earnings don’t make sense with their corporate structure. BTW…FFO kind of has a pseudo-standard in the form of a NAREIT guidance document (https://www.reit.com/advocacy/policy/financial-standards-reporting/nareit-ffo/guidelines-reporting-performance-share) but “Adjusted Funds From Operations” (AFFO), which every REIT management emphasizes and most everyone uses to evaluate REITs, has no standard definition. In other words, they’re all making it up.

    How about your Kinder Morgan shares? I haven’t read one of their earnings releases in a while…is Richie Rich still drinking the “distributable cash flow” kool-aid?

    And what of your recently increased position in B2Gold? Here’s their latest management and discussion analysis: http://www.b2gold.com/_resources/financials/Q2MDA2016.pdf

    Ctrl + F shows me that the phrase “Non-IFRS” appears 39 times. They list their adjusted income BEFORE their IFRS income (the horror!), and they don’t reconcile the differences prominently in the discussion…they wait until a footnote at the end of the document (pg 31).

    Scoundrels!!!

    Oh and while we’re at it…which accounting standard do you consider MORE pure and holy and true? IFRS or GAAP?

    Sorry, but I think it’s disingenuous to say that a company discussing pro-forma metrics “discards standard accounting practices and invents its own methods”.

    First: all accounting practices are invented.

    Second: the standardized numbers aren’t “discarded”. They still have to report them and reconcile their pro forma metrics to the standard. That’s the law.

    It is up to the investor to decide if the adjusted numbers are, as management claims, really better indicators of the company’s financial situation or if management is just putting lipstick on a pig. And yeah, usually that means you have to read the footnotes.

    Your post implies that the pro forma numbers are somehow not representative of the company’s financials, but there’s no discussion of why the GAAP metrics are MORE representative or what the “real” numbers tell us about the “true” financial situation of the company.

    Just that management made up their own version of EBIT and talked about it a lot and that’s bad.

    Like I said: your stock, your choice. Do what you want.

    But I have to disagree with you about pro forma accounting in and of itself being a primary reason to sell a stock…

    …and if it is a reason in and of itself, then you have a few more sales to make.

    • The market regulator says that a unit of measurement has to be a certain thing, say a yardstick. A ‘yard’ is defined and everyone understands what a yard is. If someone comes along saying that a yard is an incorrect way of measurement or inconsistent with their philosophy and would rather report in ‘meters’ instead, then thats fine too — as long as the meter is well defined and understood by all who are using that unit. Not to say that one unit of measurement is better than the other. They are both measuring accurately and the people reading those units understand what it means.
      The problem arises when an outlier says that both a yard and meter are incorrect and will use a new unit of measurement which is neither a yard nor a meter. This new unit is not really understood by most people unless they are professionally affiliated.

      This is where I am at. I am not an accountant and do not understand what these new earning numbers mean. Is it better than GAAP measures? I dont know. If I understood them, I would probably not mind it and stay invested. In the case of using FFO/AFFO in REITs, I understand the unit of measurement and willing to invest money into those companies. As mentioned in the post, my rule #1 is to understand what I am invested in before putting my capital at risk. If that basic premise is not valid, then I will not be investing any money into that company. For all I know, using this metric of measurement may be a better way to measure performance and the rest of the accounting world will change to incorporate it. But until that happens, I will take my money and wont be investing until I get further educated on that matter.

      Thanks for sharing your thoughts. Lots to learn on my end 🙂
      R2R

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