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- (Arpad Benedek/iStockphoto)
- (Arpad Benedek/iStockphoto)

STRATEGY LAB

I’m decluttering my portfolio – and you should, too Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

This week my family is moving from a bustling North Toronto neighbourhood to a small town about one hour outside of the city. Even though we’ve been packing in bits and pieces for the last few months, there are still a lot of last-minute decisions we’re making about what to keep and what to throw away.

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Moving houses is a great time to declutter our lives. But we don’t need to wait for any special life events to declutter our portfolios. Sometimes we buy stocks only to realize, some time later down the road, that the situation isn’t working out as planned. If you have stocks that are cluttering up your portfolio, I suggest you consider selling them so you can run an investment portfolio that is clean and matches your current strategy.

In the case of my Strategy Lab model portfolio I’ve only eliminated one stock so far. I sold shares in Sprint when it was taken over by a larger Japanese operator and no longer fit with my strategy for growth investing. On Tuesday, I’m selling another stock that I think is cluttering up the portfolio. That stock is cloud hosting provider Rackspace Hosting Inc.

When we started the Strategy Lab project in September, 2012, I saw Rackspace as a leading player in cloud computing. I knew the stock traded at a lofty multiple of sales, and that there would be the potential for very strong price competition from Amazon.com, Google and others. But I felt Rackspace had carved out a strong position as the company that cost more, but provided awesome customer service. Not everyone wants bare-bones cloud-computer access such as what Amazon provides.

Unfortunately, the growth story just hasn’t played out as well as I expected. Rackspace posted only 17-per-cent growth in revenue in the 2013 fiscal year. While that’s a very respectable rate of growth, I suspect it is well below Amazon’s cloud-computing growth rate. And it isn’t enough growth to justify a forward price-to-earnings multiple of 53.

Furthermore, I believe price competition is only getting worse, which will make it tough for Rackspace to justify big premiums for their high quality service. Amazon and Google keep dropping their prices for cloud computing and I see no reason to think this historical behaviour will stop any time soon.

Rackspace is only about 2 per cent of my Strategy Lab growth portfolio, but I still see it as clutter in my portfolio that shouldn’t be present.

If I had to start over again I would not add Rackspace today, so I have no business holding it any more. I’m already exposed to both Amazon and Google, who I consider to be superior players in cloud computing. Just as my life is more tidy after throwing a way a bunch of stuff I don’t need any more, my portfolio will be cleaner without Rackspace.

Momentum and quantitative investors might be annoyed by this kind of move. The stock now trades at about $37 (U.S.), up from the mid-20s last month. Analysts who follow the stock have been raising their earnings-per-share estimates, which is something that pros widely consider to be a good sign. Surely there must be more to squeeze out of the stock before I dump it, right?

Honestly, I don’t think I could possibly predict where the stock will go in a day, a week, a month, or even a year. I’m not interested in short-term games. I’m interested in investing in companies that are disrupting industries and stand a chance of being long-term winners. Rackspace is a fine company, but I no longer feel it represents the kind of opportunity I’m after.

Moving forces you to reconsider what you physically own. Nobody is going to force you to reconsider what investments you own. Maybe it’s time you took a look at your own portfolio and got rid of some clutter too.

 

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