Tuesday, July 15, 2008

As recession bites Sky City bites back

I have had a correspondent through email over several months asking me about whether he should sell his Sky City Entertainment Group Ltd [SKC.NZX] shares. In March he asked the following question.

I'm a big fan of your blog, checking it most days for updates (particularly after a tough day on the sharemarket).

I just have a quick question regarding SKC. I hold some shares, which make up about 2/5ths of my (rather small) portfolio - as of late, they seem to be doing nothing but falling. Now, I am not one to sell on a whim, but I have been asking myself recently, is SKC something I should stick with?

I bought in at $4.30 and, after the 7 cent drop today, have lost a fair amount of money. Where do you see this stock going in the short to medium term? How about the long term? I've read the newspaper articles, including the ones on your page, that were posted today, but I'm not sure what to make of the situation.

I suppose selling when the price is so low is not really an option, but would love to know what you think as you are also a holder of SKC shares.

My answer was:

Now I don't really recommend what others should be doing with their
shares or investments but I will tell you what I am going to do with
my SKC shares and why and maybe that will give you an idea.

The rider is that your circumstances will be different to mine: the
dollar amount you are talking about will be different, your investment
term might be longer or shorter, you may have held the shares longer
or shorter than me, etc ,etc.

You will have to decide based on those and other conditions.

I have held my 35000 shares for around 6 years and hold them at a cost
of just over 2 bucks a share.

I don't check share prices daily but it sounds like the SP is around
$NZ 3.70 odd as of today. That is the lowest price they have ever been
since 2002 but at one stage mine were worth $70000.00 more at their
high point of around $5.70.

My investment term for shares is a minimum of 10 years, so I'm not
particularly worried about their current share price. Every share is
getting battered.

The current uncertainties re the credit crunch are a concern to me and
I believe shares could drop another 20% easily, so be prepared for
your shares to drop below 3 bucks.

In the long run though, SKC shows some promise.

The new head seems aggressive in his desire to improve business
without buying more businesses and he has the track record in other
casinos to back up his big mouth.

Some fat has been trimmed from operating costs and I believe the
company is ready to bounce back.

The company does have a largish debt burden but has very cheap credit
funding secured for many years.

The only cloud on the horizon is government legislation.

It is a great cash business, a monopoly in most of its markets and a
great hedge in uncertain economic times.

I have no intention of selling, but if you need the money the shares
are not going to improve in value until the credit crunch has blown
over and that is going to take many months to come.

I hope that has been helpful.

In subsequent emails my correspondent continued to fret over the plunging price of his Sky City holding.

I answered that the company will do OK in a recession, with the implication being that other companies will suffer.

Retailing stocks in New Zealand have been especially hard hit. I have held several retail stocks for some years but given plunging stock prices have bought some new retail stocks, as well as other sectors, into the Share Investor Portfolio.

The general point made to my correspondent was that you shouldn't sell your shares unless you really needed to or if there was something significantly wrong with the company you invested in.

The Sky City example makes a good general point. Stocks and investments are losing value currently. There are good reasons why that is the case. A probable global recession brought on by the Sub Prime credit crunch and high oil, interest and food costs will have impacts on company profits. That will not last forever though, so unless you need the money selling is not a good idea.

You invested in a business and businesses have good and bad times. Get used to it.

Investors who sold Sky City over its share price rort will probably be kicking themselves. The capital value of the company has nearly halved since February but the profit guidance made in that month was re affirmed yesterday.

"There's a lot of concern that in this environment there are a lot of companies contemplating earnings downgrades and we wanted to confirm that we weren't," SkyCity chief executive Nigel Morrison said.

Proving that Mr Market has gone overboard in marking this company down.

Sky City isn't recession proof though. Expect it to struggle slightly in the 1 July to 31 Dec half.

Other stocks listed on the NZX have also been oversold in my opinion.

My correspondent didn't sell his Sky City shares shares.

Disc: I own SKC shares in the Share Investor Portfolio

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1 comment:

  1. I agree - you shouldn't be afraid of the recession eating on your stocks. You should hang on in there - as soon as the recession is over, companies usually bounces back to the top. The ones that don't survive are usually the ones who have stock holders withdrawing during the crisis.

    In Pittsburgh, mortgage rates has started to drop, and local companies and small businesses has also stopped from loaning - a sign that the recession is fading.


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