Robert Gay manages Global Equity Analytics and Research Services LLC (GEARS) which manages several Covestor models, including the Luxury Liner model. Robert recently sold Fairchild Semiconductor (NYSE: FCS) from that portfolio. We asked Robert to share his reasons for selling. His response follows.
My decision report for FCS is here: http://www.the-gears.com/pdf_files/igetpdf.aspx?pdf=fcs
The deterioration in performance metrics and the extended share price prompted the decision. Sales growth is high, but down in the past two periods. Gross profit margins have been rising since 2009 but the over the past three periods the improvement has been dampened on the bottom line by higher SG&A costs. Inventory turnover is up, suggesting that the gross margin may fall in the future.
Cash flow return on total invested capital is low and dilution is up as shares outstanding increased in the past two periods. The shares have been very strong recently and trade at a substantial premium to their historical range of volatility. Valuation measures are also extended, showing the stock trading at the top of valuation ranges.
Still, the company has an aggressive capital expenditure campaign underway, and the rising SG&A expense may indicate leverage for the future.
To buy this position back, I’d need to see sales growth stabilize at above 15%, and the SG&A expenses and capital expenditures fall relative to sales. That would indicate that the company has moved from investment mode to payoff mode and give me more confidence in the future direction of profitability.