Viacom (NASDAQ:VIA) jumped last week after the company renewed a multiyear contract with DISH Network (NASDAQ:DISH). Rahul Garg named Viacom his best idea on April 8. With the stock up nearly 13% since his recommendation, I thought I’d see if he is selling on this news, or buying more.
Before taking anyone's investment advice it is a good idea to check their track record. Click here to see Rahul's track record.
Ken: As you predicted, Viacom and Dish have renewed their agreement and Viacom’s stock has had a nice runup last week.
Rahul: I think Viacom is still cheap. Even after this runup, Viacom is trading at 7-8x expected 2017 earnings with consistent future cashflows from contracts with companies that have stable revenues even in recessions.
Ken: Last week, Zacks reported that at least one Wall Street analyst reduced his earnings estimates for Viacom.
Rahul: Terms of the agreement with Dish were not disclosed. However, I see them increasing affiliate fees over next few years at least. The ad revenue I think will improve as well with ratings that are improving as Viacom is investing more in content creation.
Teenage Mutant Ninja Turtles are coming this summer and my kids (and likely many others) are excited. Alibaba is helping them market it in China and hopefully becomes their long term strategic partner in Paramount.
Ken: Doesn’t this agreement with Dish reduce the need to find a strategic partner for Paramount?
Rahul: Yes, but I still hope they go ahead with a minority sale in Paramount to shore up their balance sheet. Moreover, such a move would unlock the value of a studio that brought us Indiana Jones and Star Trek. To me, Paramount is worth much more than is implied by the current stock price.
Ken: So you are not selling on this news. Are you buying?
Rahul: I think it's a good buy even now. However, I had already added to my position in the last few weeks to bring my average down. After last week’s runup, it is now 15% to 18% of my fund.
Trading wise, I would let people who made short term money and want to get out sell a little before I would buy more.
I think we are in an overall "be fearful when others are greedy" phase of market so I have my fund 30% in cash.
Nevertheless, if the short-term traders sell it down a little I will likely buy more. After all, I am getting a 4% dividend yield while I wait for rest of the story to play out.
My Take: Whenever a stock makes a big jump, I hear from lots of investors who want to know if they should sell it to “lock in their gains.”
The problem is that if you consistently sell your winners when you are up 15%, your portfolio will be increasingly weighted towards your losers and small winners. If you are a gardener, this is like pulling out the flowers and leaving the weeds.
Gardeners understand intuitively that it is a better idea to water the flowers. In other words, buy more when the market starts to confirm that your investment thesis is right. If you don’t have 30% cash like Rahul does, you might consider pulling some of the weeds, i.e., sell some of the losers to free up cash so you can increase your position in your winners.
Do this consistently and your portfolio will be increasingly weighted towards your winners.
Disclosure: I am the portfolio manager for a mutual fund advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
