Q: This is a portfolio management question. I help manage my retired sister’s stock portfolio; it consists of 36 generally high-quality companies, with focus on Canadian dividend-paying stocks (as she benefits from favourable taxation of eligible dividends); the portfolio has done very well over the years (thanks to advice from 5i); the philosophy is generally "buy-and-hold" with minimal turnover. Portfolio breakdown is roughly 60% Canadian (many with U.S./international focus, e.g., TD, RBI, TRI, etc.), 30% US, 10% foreign. All 36 stock holdings are 2.0-5.0% positions (median weight, 2.7%), except Aritzia (ATZ), which due to declining share price is down to only 1.4% weight. My question is: what to do with a stock like Aritzia? the portfolio management style would be to add to this position, given that it is fallen a lot, and the expectation is that it will recover, and potentially do quite well, in the long-term. On the other hand, there is a risk of continuing bad performance, and one doesn’t want to add good money after bad (the ATZ cost base is already near the median for the 36-stock portfolio). So, from a portfolio management perspective, how would you handle such a stock that has fallen quite a bit below the 2.0-5.0% target weighting of the rest of the portfolio. (Further, it doesn’t pay a dividend, either.)
Ted
Ted
5i Research Answer:
While we cannot personalize responses, we feel that ATZ will need a few or several quarters of earnings to stage any sort of reversal. In general, we do not like 'doubling up' on stocks with negative momentum, and we see no rush to buy into this name at this time. A stock below a specific target weight can be akin to a 'cash drag' if it is to move sideways for the intermediate term, but we consider ATZ to be a hold at this time and needs to be watched much more carefully. The results were disappointing, but stabilization in future earnings results can help the name to regain its balance and position size, and we are preferring to wait for further indications on the future direction of the business before making any changes to the position.