Why I Sold Tucows

By , August 4, 2014

It’s  hard post to write, but on Friday I sold most of my remaining shares of Tucows. Last year – before the reverse split I sold a little more than half, and just now I sold most of the rest.

I invested in Tucows back in 2005 or 2006  for reasons which were admittedly, more emotional than savvy. As I began to learn more about investing and in particular, drank the value investing Kool-Aid , I added considerably. Specifically in 2008 I realized that a conservative valuation of their aftermarket domain portfolio (a.k.a “Yummynames”, before Yummynames actually existed) was worth more than twice the actual market capitalization of the entire company. It was surprising to find such a textbook value investment so close to home, but after I got over that it was easy to pile in and buy more, and more, at an average cost of $0.65/share (or $2.60 post-reverse-split adjusted)  finally doubling down in 2012 at roughly $1/share (or $4 post-reverse-split).

Selling Tucows after being a shareholder for over a decade was hard. Canadian value investing guru Irwin Michaels expands on why “selling is hard” in his interview in “Stock Market Superstars: Secrets of Canada’s Top Stock Pickers” (cheesy title, good book):

Q: What’s your selling discipline?

A: It’s a very tough discipline, and over twenty years ago, I wrote an article for the Financial Post. It was entitled “Buying is easy; selling is hard”. I use this analogy all the time. You buy into a company, you become friendly with the president, and you go out for dinner. You even have their kids over to your pool, and you have to differentiate between liking the company and management and liking the stock price. The bottom line is that the stock goes up –and you still like the president, you still like the company, but it’s no longer cheap. The stock has doubled. It’s trading at say a P/E of 25, and you decide your selling discipline goes in here. If you sell it the next time he calls you to for a round of golf, you feel like you’re Benedict Arnold.

Tucows remains a key vendor to easyDNS (we use their openHRS registry backend for our ICANN credentials and openSRS to support all the TLDs we are not directly accredited in). Historically there has been somewhat of a revolving door in employees between the two companies. The wider market is waking up to the Tucows story, especially since they launched Ting. (Which is, almost by definition as a value investor, my queue to exit).

I still think Tucows is a great company (I’m hanging onto a couple thousand shares just to ‘keep the faith’). In terms of publicly traded domain related companies they are still a better value than the alternatives (i.e. Demand Media, and even the forthcoming Godaddy IPO). But I don’t think they’re “no-brainer cheap” anymore. If they become so again, I will be back.

It should also be mentioned that a significant factor in this decision is that I agree with the observers who feel the wider markets are rolling over, the bull market in equities is 5 years old and the upside is limited. I could obviously be wrong, but I think the risk/reward picture favors cashing out now. Warren Buffet has opined:

“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

Tucows has been one of those “punch card investments” for me, and I’m grateful to Elliot and the entire team for making that happen.

Further, I’m going to be using the proceeds for another one of those “punch card investments”, more on that when it happens.

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