Thoughts on my rising Pandora position

I trimmed my position in Pandora during this year after a strong rebound of the share price. It continued to perform very strongly and it is again time to decide about my rising Pandora position. The share price has just crossed my last fair value estimate …

This is not investment advice. Please read the disclaimer.

Stupid me sold Pandora (PNDORA) shares this year. Twice! Obviously, with shares trading at DKK 650 today (Nov 25th), I would sit on much higher paper gains if I had not trimmed my Pandora position on July 1st for € 49.79 (DKK 371) and Sept 9th for € 66.66 (DKK 497). Both times, I sold the same number of shares. Total number of shares sold are equal to the number of Pandora shares I still hold as of today. To take the above perspective believing that my sells were stupid is legit, especially with the benefit of hindsight. But, I do not view it this way.

My Pandora position grew too big to feel comfortable or right within my portfolio context. Additionally, it was a turnaround investment (or speculation) with lower overall quality and conviction. The business was/is hugely affected by physical-retail-specific risk factors brought upon us by the pandemic and resulting in a much wider range for possible outcomes. So overall, I am still convinced that it was not neccessarily the wrong decision to trimm (twice).

»The correctness of a decision can’t be judged from the outcome. Nevertheless, that’s how people assess it. A good decision is one that’s optimal at the time it’s made, when the future is by definition unknown. Thus, correct decisions are often unsuccessful, and vice versa.« – Howard Marks

Howard Marks

What has changed during the last few months? Pandora rallied 230% from its DKK 195 low in mid March. First of all, the company secured survival even during a worst case pandemic scenario in 2020 by offering treasury shares and securing additional loans as well as soften credit covenants. Since the turnaround seemed well underway in Jan and Feb, the longer-term gains can only be captured after the short-term survival. In addition to the described financial measures, the operations were managed very well, store concepts, online shops, commitment to (paying) its employees.

My last fair value estimate from May came out at DKK 644 per share (link). During the pandemic I did not see much value in updating my valuation estimate. But with a tendency not to trimm further I have to ask …

What should provide further upside? As written earlier this month Pandora faces big risks from new lockdowns but turnaround is well underway. They seem to be very well prepared for the most important Christmas season (shifting traffic online, opening of pop-up-stores, lengthen peak season). Still, there is some risk that Q4 profits dissapoint, i.e. that volumes can’t behandled. But this is a short term issue. In general, the turnaround is going very well with most key markets showing strong sales developments and that is the importnat lever for long-term value. Saving targets were increased yet again. Financials are rather solid for hte current situation and risks seem to be well managed. China is still lacking but provides a huge upside if solved. A dedicated team tackling the Chinese market and its peculiarities is installed.

About this Christmas season: I believe there is not only risk but also a (however unlikely) case for very strong Q4 sales. Many groups of people earn the same money as pre-pandemic, some earn more cash and most them

For the time being I will not trim my position further. Hopefully I experience some further gains, but of course I could suffer losses. I look forward to their annual report, hopefully with some more of the dust settled and a valuation update and I might get a better grip on fair value. Since I sit on paper gain, selling would trigger big capital gains tax if not set off by losses. Questions are:

  • If I showed discipline in July and Sept, what am I showing now not selling at my prior fair value estimate?
  • How would I think about todays decision not to sell when shares are falling -20% during next week? (#pre-mortem)
  • Are there stong biases at work?

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