In this third blog in the series covering 35 years of COTE 100 and the main lessons we have learned from our existence, I return to the investment aspect, more precisely to a crucial lesson that we have learned.

The decision to Sell Should Not Be (Too) Influenced by Tax Costs

Those who have known COTE 100 since its beginnings in 1988, particularly early subscribers to the COTE 100 Financial Bulletin, know that a good part of our early stock market successes were based on one stock: Bombardier. The stock was one of the first that we recommended in the COTE 100 Financial Bulletin in 1988 and acquired in our managed portfolios. We knew the Quebec company very well, plus we knew Mr. Raymond Royer, who was president and chief operating officer of the company from 1986 to 1996, and in whom we had great confidence.

Many investors will remember that Bombardier’s stock was a big stock market winner in the 1980s and 1990s. I remember very well that some investors criticized us at the time by saying that the success of COTE 100 was based solely on the Bombardier stock. However, I have often said that stock market success often rests on one or two big winners – what is difficult to do is to hold on to these stocks for many years!

A significant part of Bombardier’s financial and stock market success in the 1990s came from its Aerospace division. Specifically, its CRJ regional jet program launched in the early 1990s represented an innovation in the commercial aviation industry and strongly fuelled the company’s growth.

But this commercial success changed the profile of the company. Until then, its activities had been divided fairly evenly between its three main divisions, Aerospace, Mass Transit and Powered Products (Ski-Doo). However, the resounding success of the Aeronautics division and its regional jets meant that the division generated more than 90% of the company’s profits at the end of the 1990s. For us, considering the very cyclical nature of the commercial aviation sector, this situation significantly increased the risks for the company and its stock.

Also, the departure of Mr. Royer from Bombardier in 1996 somewhat shook our confidence. Also, we found that the stock became particularly expensive at the end of the 1990s, its price-earnings ratio exceeding 25.0, which we considered generous, especially considering the cyclical aspect of aeronautical activities.

However, we hesitated for a long time and postponed our decision to sell the stock. One of the reasons for our hesitation is surely that we were a little guilty of having “fallen in love” with this local stock which had enriched us so greatly over the years. Another reason was that the cost of our Bombardier shares, most of which we acquired in the late 1980s, was particularly low compared to its market value in the late 1990s. Selling the stock would have been very expensive in taxes to our investors (including us).

We repeat that it is sometimes more profitable to be lucky than intelligent to succeed on the stock market! We were very fortunate in our decision to finally sell our shares of Bombardier… in August 2001 for about $24 per share, which represents a bit less than $500 on an adjusted basis.

Why did we ultimately make the decision to sell Bombardier?

At the time, we observed what had just happened with Nortel’s stock, both its rise to the top of the Canadian stock market at the end of the 1990s, in the middle of a techno bubble, and its descent into hell which followed the bursting of this bubble in 2000 and 2001. Although Bombardier was completely different from Nortel, we found that there were nevertheless certain connections to be made, notably in the high valuation of its stock.

A few weeks later, the sad events of September 11, 2001, took place and Bombardier’s stock had lost almost half of its value. As we know, the stock never regained its lustre of the late 1990s.

Since that time, we have tried to no longer let the tax aspect influence us in our decisions to sell a stock. This decision should always be primarily focused on the fundamental elements of a company: the quality of the business model and related risks, the management team, and the objective valuation of a stock.