Coach: to Sell or Hold?

Back in 2008, Coach (COH) showed up on the Magic Formula stock screener. I researched it and liked what I found: low debt, lots of growth, and a high-quality product. A coworker remarked that everyone and her sister carried a $500 Coach bag, and looking around downtown Denver where I worked, I saw he was right. As I recall, Coach was busy establishing a beachhead in China and closing some lower-earning stores.

It didn't matter that I didn't understand why anyone would pay $500 for a purse. Two of my purses, a fabric Sack and a no-name raffia, cost $3 at thrift stores. A few months ago, I went wild and spent $50 on a gently used nylon Kenneth Cole handbag that I carry every day now. (The store owner called it "handsome.") I don't buy Coach purses--that's why I have money to spend on Coach stock.

I paid around $30 a share for Coach in 2008 and now it's trading in the high $50s. In my IRAs, I put a big bet on it and held it for two years, even though that wasn't according to the Magic Formula. It was just such a good company. I also have Coach in my non-IRA account, and wondered whether I should sell it or hold it. On the one hand, the Magic Formula has worked well for me. OTOH, Coach is still a great company with growth, low debt and a popular product. If I sold it, I'd have to pay tax on the earnings and find a better investment for my money.

Someone recommended selling enough of the stock to get back what I paid for it, but it seems to me that if it's time to sell, I should sell it all. I looked elsewhere for wisdom.

My handsome new handbag held a book called The Little Book of Value Investing by Christopher H. Browne of Tweedy, Browne & Co. LLC. The company used to be down the hall from Benjamin Graham (a client), and Walter Schloss had a desk in their office. Christopher Browne worked there for about 40 years. Here was just the person to turn to.

In the chapter "Watch the Guys in the Know," Browne says,

There are a lot of reasons insiders may sell shares in their company. They may wish to diversify their holdings, plan their estate, buy a dream house, or pay off a soon-to-be ex-spouse. They may sell shares obtained by exercising stock options. For these reasons, sales by insiders are not as strong an indicator as their buys.

I saw that a lot of insiders were selling Coach (there were several exercises too) but nobody was buying it in the $50s.

In the chapter "Buy and Hold? Really?" Browne says,

Long-term capital gains earned on stocks held for at least a year are taxed at 15%....And that is before any state or local taxes.

Turnover is the enemy of compounding and the friend of the Internal Revenue Service.

Many investors think they should be proactive and keep looking for ways to tweak their investment portfolio when just sitting tight, if they made the correct choices in the first place, often would be the better course.