WASHINGTON. Assessing our own portfolio as the current earnings season shifts into high gear, we note that our beleaguered Allergan shares (trading symbol: AGN) have been imploding for what seems like the umpteenth time over the past two years. It seems like just yesterday the share price was headed from $160 per share to $170. Investors hated their latest essentially positive earnings numbers. So down those shares went once again. Another surprise beast in our portfolio is Clearway Energy Class A shares (CWEN/A). But lately, this usually benign stock, is also taking a nervous header.
Allergan: The pharmaceutical company that can’t seem to shoot straight
As for Allergan, the company actually beat its numbers in its latest reporting period. But the company continues to take writedowns on this and that, essentially negating their reported gains. Worse, their highly touted new but not yet approved drugs have been getting an iffy reception from the FDA, so the company is not executing very well right now. The stock remains broken, having once again dropped like a rock over the last few weeks. It now stands at around $145 per share and is trying to hold at that level.
Allergan still a good bounceback candidate* for 2019, given how badly beaten down those shares were in the fall of 2018. But the company is earning a reputation as a serial disappointer when it comes to regaining its onetime market mojo. Even this week’s new $2 billion share buyback announcement wasn’t enough to stem the latest selling bout. As when Allergan collapsed last autumn, every time its share price tries to struggle back, the shares get hit with another wave of sellers trying to escape these cursed holdings at the best available price before they plunge again. They won’t try to climb out of their latest hole again until all those who want to sell have left the premises.
The lesson: Never let a portfolio position get too big
Sadly, Allergan serves as our portfolio’s reminder that we are all sinners when we develop a way-too-big position in pretty much any stock. That’s what we did with Allergan. We are doing our penance now, and hope to shed our sackcloth and ashes some time in 2019. And hopefully at a profit. But we’re about to throw in the towel as well, a few expensive shares at a time.
A California tragedy stalks high-yielding “green” utility company Clearway
Meanwhile, our “conservative” position in Clearway Energy Class A (CWEN/A) remain anemic. Clearway A is a utility “yieldco.” It’s basically a stock that throws off a high dividend yield with little chance for a significant capital gain. They, and their “parent” company Clearway (CWEN without the A) are losing velocity because they’re one of the major vendors contracted to sell renewable energy to California’s giant utility, Pacific Gas and Electric, aka, PG&E (trading symbol PCG).
But PG&E filed for bankruptcy protection earlier this week due to its potentially huge damage liability. This stems from last fall’s series of vicious California wildfires. That massive conflagration destroyed immense tracts of forest and a substantial number of homes and businesses. It also caused an abnormally high number of fatalities. Since PG&E operates there and might be at least partially at fault for what happened, everyone in the world will sue PG&E. Some already have.
Conclusion: PG&E and its investors are in deep kimchee in California, a now-socialist, one-party state that can never extort enough money from people and companies to pay for its own sins. Which include the disastrous management of its tinder-dry forest resources. Which is how PG&E got in this mess. They run power lines through all that tinder. On wooden poles. Oh, well.
All of which gets us back to those Clearway A shares. They pay a handsome dividend. But Clearway derives roughly 25 percent of its fossil-free energy generation income by selling its virtuous power output to PG&E. Why? Sacramento’s virtue-signaling single party rulers force PG&E to buy ever higher amounts of “green” energy from companies like Clearway.
A Hamlet-like question if you hold Clearway or Clearway A shares
But now the big question is this. Will CWEN’s California-mandated fossil-free energy contract get cut back or stiffed in PG&E’s bankruptcy proceedings? And if so, what will the impact be on CWEN’s shares? And its fat dividend? Re: Hamlet: To be or not to be? Or, better yet, to hold or not to hold?
This is a bad, indefinite risk that will keep these shares under water or subject them to massive selling bouts based on the daily headlines. You know how our legal system works. Shares could be under fire for years, or perhaps a decade.
So all of a sudden, our placid, boring, high-yielding “green” utility holding has become as volatile as a tech start up. And the volatility lately has been mostly to the downside. We have sold down half our position in CWEN/A for a modest loss and will likely dump the rest fairly soon. If the bankrupcty judge allows PG&E to maintain its contracts with CWEN and others, we might be sorry we did this. But allowing you and your shares to remain subject to a bankruptcy court, perhaps for years, is a risk suitable only for risk-based hedge funds.
Don’t get near a bankruptcy and don’t invest in anything California can ruin
Here’s a rule of thumb. Don’t allow a business-hostile state like California, Connecticut, New Jersey or Maryland to threaten a major chunk of your stock portfolio if you can avoid it. Clearway currently finds itself threatened by a bankruptcy filing in California. The Sanctuary State hates anyone who makes money (except politicians and high-tech barons). ‘Nuff said.
We believe Clearway’s shares can eventually recover from this undeserved bout of bad fortune. But, as with Allergan, if we keep waiting and waiting for a recovery, we might miss the latest bull market train.
In Wall Street jargon, by stubbornly holding on to such red-ink positions, we risk an unacceptably high opportunity cost. Prudence sometimes dictates that you put your pride out with the cat when one of your holdings turns sour. So you hold your chin up and take the nasty loss. Then you re-deploy your reduced capital into better ideas. (You hope.)
On the other hand, most of our portfolio is recovering from December’s crash
We did get some good news in January. The bulk of our portfolio is recovering fairly nicely from December’s horrendous bloodbath. We were off roughly 11 percent as of last year’s final day of trading. But we’re now down less than 4 percent and still gaining. Unlike Allergan and Clearway A, our preferred stock positions have been doing quite well.
Yes, they, too, got hit. Just like everything else last fall. Yet those reliable fixed preferred dividends keep generating income. And they arrive at a steady pace. They served as a fine shelter during last fall’s vicious selling storm.
Additionally, our holdings in two real estate REIT ETFs are doing nicely as well. In turn, we’re talking about the high yielding real estate / mortgage ETF, symbol REM; and Schwab’s property REIT ETF, symbol SCHH. Even though home sales have crashed recently, most real estate-oriented stocks continue to rally. We’ll take it.
On other fronts, we continue to slowly build positions in ETFs that live in decent current sectors, taking advantage in particular of shares that our brokerage house trades with zero commission. That spreads our risk in a way that should prevent another Allergan disaster from occurring in our portfolios anytime soon.
* Bounceback candidate. We define this as a stock that endured a barrage of tax loss selling at the end of the calendar year. Such stocks often, but not always, recover and prosper in the New Year. Buying such shares at the end of the previous calendar year can result in a quick 10 percent gain in 30-60 days. Some brokerage houses actually provide a list of these near the end of the previous year. No guarantees. But buying carefully selected shares of beaten-down companies often works. You could be buying undervalued companies at a bargain basement price. Achieving fair value for the shares can give you a nifty early gain. But again, no guarantees.
— Headline image: Allergan facility in Westport, Republic of Ireland. (Photo courtesy of Allergan website)