Thursday, January 21, 2010

Sold KMX

If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?

On Friday, Dec 18, 2009, Carmax (KMX) reported a good quarter.

From its earning release, it states,

"Net sales and operating revenues increased 19% to $1.73 billion from $1.46 billion in the third quarter of last year. Comparable store used unit sales increased 8% for the quarter. Total used unit sales rose 9% in the third quarter. The company reported net income of $74.6 million, or $0.33 per diluted share, compared with a net loss of $21.9 million, or $0.10 per diluted share, in the third quarter of fiscal 2009."

It took the market by surprise. Its share shoot up 7% or $1.53 in one trading session. I sold all my shares at $23.22 and paid $7.24 for this transaction. I bought KMX first in December, 2007 and added in June 2008. In the two years holding period, I made about 39.48%, satisfactory but not extraordinary. KMX has a unique business model, a strong balance sheet and a great management. It stands to benefit from current environment grabbing more market shares from its competitors. Its margin expanded, its sales increased and its cost reduced. Moreover, I don't think its current valuation, at almost two years high, is too rich.

I am selling primarily for portfolio management purpose. I am raising cash at my taxable account for a bigger opportunity, a more undervalued opportunity and a more controllable one.

A friend has asked the merit of stop loss order. Here is what Seth Klarman said in his famous and expensive book -- "Margin of Safety".

"Although this strategy may seem an effective way to limit downside risk, it is, in fact, crazy. Instead of taking advantage of market dips to increase one's holdings, a user of this technique acts as if the market knows the merits of a particular investment better than he or she does."

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