Its good to be back in the saddle, after a week off for our eldest daughter’s wedding. If there’s one thing I learned this past weekend, it’s that you have to expect the unexpected. Just hours before the wedding, the bridge to the island where it was held was shutdown due to a “suspicious package”. That meant no one on or off until it was resolved, which could have made for a reception without any food, or many guests stuck on the other side of the bridge. Thankfully, it was resolved quickly, and all went as planned. Something like that happening was the furthest thing from my mind. I just wanted a great day of celebration, and to make it down the aisle without crying or stumbling.
That got me thinking about investing, and our propensity as investors, myself included, to not consider the worst case, the “black swan” event as it were. You can’t live your life in fear as an investor, but you can take steps to protect yourself against the unforeseen. When it comes to company specific risk, position-sizing is huge. I’ve seen individuals, and managers, that have loaded up on a single name – one where they see so much upside that they become blind to what could go wrong. If and when the hammer drops it’s too late. Too much portfolio concentration can make you rich, if you are right, but it can also bankrupt you if you are not. The pain of loss here is a lot greater than the euphoria of scoring big. You never know when the bridge to your island will be shut down.
Elsewhere, while catching up on the past week, I noticed what’s been going on with avocado name Calavo Growers (CVGW) . Calavo is somewhat familiar due to its association with citrus name Limoneira (LMNR) . Calavo still packages and distributes LMNR’s lemons, oranges and avocados, and owns a stake in the company. Until 2019, LMNR also had a stake in CVGW.
What caught my attention, is the fact that CVGW has been absolutely slammed this year. Shares hit $85 back in March, and closed Monday at $35.39, a seven-year low. Last Thursday shares endured a 17% hit following the release of third quarter earnings. It was likely not the quarterly results per se that caused the damage – revenue of $285 million beat consensus estimates by $6 million, while the 17-cent per share loss was a penny ahead – but rather what the company had to say about guidance. In fact, management is not providing near-term guidance due to “inflationary pressures” on raw materials. That was certainly not what the market wanted to hear, but it is the current reality, and you’ll likely be hearing a lot more about inflation.
Ever the dumpster-diver, always on the lookout for situations where it appears that the market has over-punished a name, I am keeping an eye on CVGW, but am not yet convinced there’s enough meat on the bone to take a stab at these levels. Shares trade at just under 23x next year’s consensus estimates of $1.56/share. Just seven days ago, the consensus was at $2.46 and three months ago it was $2.81.