Last Friday one of my positions dropped 25% on one day. The stock in question is the REIT CBL, owner of several malls in the US. The decline was a real wake up call for me, and moving forward I must be more selective of my purchases.
The table below gives the timeline of my CBL investment:
As the table above illustrates, CBL has not been a good investment for me. But why did I buy it in the first place? The embarrassing answer is that I did not do my homework. My fixation for high yields led me to this investment without looking to much at the numbers. No I'm writing this post to remind myself of this error, and hopefully avoid such mistakes in the future.
I'm currently reading the book The Single Best Investment: Creating Wealth with Dividend Growth. I haven't finished it yet, but it seems like a good read, and it may help me to avoid another CBL case in the future.
In the chapter I'm reading right now, the author presents a couple of tests that a stock should not fail in order to be purchased. Let's see how CBL does on some of them:
1. Debt level: Debt-to-equity ratio should be maximum 100%
Fail. Debt-to-equity ratio is 360% as of September 30th.
2. Positive cash flow: cash flow to the company after taxes is 3 times the amount of interest paid
Fail. Free cash flow is about 2.4 times interest paid.
3. Consistent growth in earnings: Around 5-10% per annum
Fail. The earnings has actually been declining.
4. Payout ratio: less than 60%
Success. Payout ratio of 54.2% by September 30th.
5. Creditworthiness: minimum investment grade
Success. S&P rate CBL at BBB-. So just reaching investment grade.
The hard fact is that I would have avoid this blunder by following these tests.
Now I'm not sure if these guidelines are a perfect fit for me, and I do believe I need some time to adjust them to my own strategy. But moving forward I will for sure do two thing:
- Finish the book The Single Best Investment.
- Have a real look at the numbers before making an investment.