118 - NACCO Stock Post-Mortem $NC

Mental Models discussed in this podcast:

• Durability
• Post-Mortem
• Resulting
• Capital Allocation

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode118

Timeline

• NACCO spun off Hamilton Beach Brands in September 2017
• I first bought shares in March 2018 at a price of $40 per share
• I averaged down in May and June 2018 with shares at a price of $34 per share.
• Averaged down in September 2018 at $32 per share and October 2018 at $29 per share
• Within a year, the stock doubled to over $65 per share in October 2019. This is the recent peak. Instead of selling, I held because I valued the company at $75 per share at the time. It wasn't yet at fair value.
• May and June 2020, I averaged down again at $26 per share and then $22-24 per share.
• In March 2021, I recognized that holding $NC was a large opportunity cost on my portfolio and I shifted some money to other stocks while the stock was around $24-25 per share.
• In May 2021, I exited my stake in $NC completely at a loss around $25-26 per share.
• Some lots were sold at a gain and some at a loss. Overall, the position was a net loss and a much bigger loss on an opportunity cost basis.

Thoughts and Key Questions

• I should have sold or trimmed after the stock doubled in less than a year. $65 per share was within my error margin for my $75 fair value estimate. Even simply reducing my stake by half would have been a good decision.
  • The main reason I didn't do this was that it would have had to sit in cash. I didn't have many other good ideas at the time.
  • My biggest mistakes are often made when I'm in cash or when I would be creating a cash position. (Always do research for new ideas!!!)
• Was buying $NC in the first place a mistake?
  • No, I don't think so. My theory was sound. I expected positive news from NACCO and it was cheap at $40 per share. It was the best idea I had at the time, I was also running a diversified 10-15 stock portfolio when I bought NACCO. 
  • My thesis was correct, but I had thesis creep as news flow came out. My original valuation placed the stock as worth between $50-65 dollars. I only upped my estimate after high natural gas income. I should have recognized that was temporary and sold. 
  • I thought NACCO was a 3-5 year hold business, but it probably should have been sized as a last puff cigar butt. When that puff came within a year, I should have sold. 
• Did I accurately assess NACCO's business model quality?
  • Yes. NACCO's service model of earning money from unconsolidated subsidiaries allows it to earn high returns on capital as the customer puts up all of the capital.
• Did I accurately assess the durability of NACCO's business?