Buying stocks is easy, selling them less so.  Therefore, in light of the Cendant (CD) news today, I thought it might be helpful to briefly look at the reasons we sold Cendant stock awhile back.  Perhaps this short exercise can help illustrate the fundamental discipline involved in making sell decisions.

We sold Cendant stock awhile back for the following reasons:

Wall Street did not care about company’s business model. The company was going through its “simplification” phase as it was shedding the uncomplimentary businesses, PHH and Wright Express, thus we were willing to wait. However, when CD sold its marketing business – the last “uncomplimentary” business, and Wall Street did not care (the stock did not budge) – that was a sign that Wall Street did not like CD’s business model, thus it will not price it at a higher multiple.

One of the premises for buying CD was P/E expansion – we did not feel that would happen. (I think this is in part what motivated CD’s management to break up the company... realization that the stock will be “cheap” forever as Wall Street doesn’t care for its business model.

We did not like real estate business. We never saw a synergy between the real estate business and the rest of the company. How does real estate relate to car rentals, travel and hospitality? Also, in the last quarter all growth in sales in the real estate franchise came from higher housing prices with no volume (number of houses sold) growth. Thus a decline in housing prices, something we expect a lot sooner than later, would cause a disproportionate decline in earnings due to operational leverage; remember leverage works both ways.

Reducing our exposure to discretionary spending. After stress testing our portfolio to the risk of a discretionary spending slow down, CD came out on top of the list as its travel and hospitality businesses have a very large discretionary spending component.

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