Choosing Growth over Income (more ISRG over AFSI.PR.A)

linear-vs-exponential

Source: evolutionpartners.com.au

We’re just going to do a quick post in an attempt to get the creative juices flowing for more posts……..so let’s look back at a decision late last year – a decision to sell some of the income generating holdings for potential growth.

When we first created our income/dividend portfolio back in 2013, it was to provide supplemental income  as a result of a decision to reduce salary out of the independent business I was working under at the time.  Eventually, an opportunity came around to add the Series A Preferred Shares from AmTrust Financial Services (AFSI.PR.A) – where concerns of bankruptcy dropped the common shares and preferred shares significantly.  We picked up the preferred shares at a 10% discount to what they were trading before news broke, and a 9% dividend.

The Hook

I have a bad tendency to revisit old decisions – and if there’s a flame that’s always burning for me, it’s Intuitive Surgical (ISRG).  I first owned shares in the company over a decade ago and the company was not only my first exposure to growth investing, but has likely been, and will always be, my most successful investment.

If there’s one thing I regret doing, it’s selling my entire ISRG holdings back in 2010 and missing out on what would be a double over the following year or two.  When I look back, it was fine to lock in the profit, especially out of the 2008 financial crisis, but then being the young kid that I was, I took those gains and bought my first car (which at least I still have today).

isrg-transactions-2005-2016

Intuitive Surgical Buys and Sells (2005 – 2016)

While Intuitive was on it’s way to becoming a non-2-bagger for me, I continued to follow the company and waited patiently.  In 2013, with a little luck, I was able to get back in as the company had a set back with wrongful death lawsuits.  Unfortunately, I was never able to buy back my original position due to the lawsuit uncertainty and availability of funds.  However, as I continued to follow the company, I slowly bought back bit by bit (literally 5, 10, 15 shares at a time) as we saved up for investments and the company continued to grow revenues and earnings (to be covered in the next post).

In early December 2016, a terrific opportunity came up as the stock dropped from $725 to $618 in the span of two months on no news except potentially Trump related.  Having already added that year at $$670, a 10% discount was enough to hook me in.

The Line 

While the price was attractive, I had the same problem as back in 2013 and the little purchases since then – no additional funds were available.  Not only were funds required (at $620 a share) but in USD no less (which I did not want to go through the hassle to convert).  I could’ve swapped shares for options but for Intuitive, I’d rather hold shares long term than gamble on short to medium term price movements.

The Sinker

While Trump might have been the cause for the buying opportunity, it also started discussion on spending and inflation, and the eventual increase of interest rates.  Preferred shares (at least the perpetual kind) act very much like bonds where the price drops as rates rise – so perpetuals, like our AmTrust Financial Services Series A from above, would eventually drop in price  (the amount would be hard to predict since they could been redeemed as early as June 2018).  If there was one guarantee, the share price wasn’t going to go any higher.

That logic pretty much did it – swapping the AmTrust preferreds for Intuitive Surgical would lock in the 30% gain two years ahead of the earliest redeemable date for the preferreds.  We’re sad to say goodbye to the 9% dividend, but with the goal of the dividend/income portfolio morphing to be focused on potential capital appreciation of rate reset preferreds, the bet here is that Intuitive Surgical compounded growth can easily make up that difference.

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2 thoughts on “Choosing Growth over Income (more ISRG over AFSI.PR.A)

  1. Pingback: Intuitive back on top (and how they might be getting their groove back)! | Fearless Cal's Investment Journal

  2. Pingback: Portfolio Update – February 2017 (+9.2%, Currency +1.9%) | Fearless Cal's Investment Journal

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