Analysis: TWTR

(This content was originally published as an Action Alerts PLUS Alert on Aug. 12, 2016. Stock prices, shares held and portfolio positions may have changed.)

As a follow-up to our earlier note, we exited our remaining Twitter (TWTR) position following a 40% rally over the past two months and 25% since July 27. We have been waiting to exit the name, which has been our last-ranked stock within our indices since the system's inception. While we are glad to be taking advantage of the rally, we recognize this is not profit-taking; rather, portfolio protection.

Exiting for a sizable gain (i.e., Lockheed Martin) is as enjoyable a task as exiting at a loss is arduous. Yet, to evoke legendary investor George Soros, "It doesn't matter how often you are right or wrong -- it only matters how much you make when you are right vs. how much you lose when you are wrong."

As we explained on Wednesday in our Chairman's Club quarterly call, the 40% two-month and 25% three-week rally in shares must be viewed through the lens of the losses we absorbed each of the three times we have sold the name over the past year and a half. Twitter is an example in eating losses, yet protecting the portfolio and members from further losses.

We sold roughly two-thirds of our positions (in equivalent amounts) in February 2015 at $46 a share and June 2015 at $36 a share. Each time we sold for a loss (10% and 29%, respectively). Yet, those decisions -- however difficult -- allowed us to avoid a 46% and 58% subsequent decline, respectively. Had we decided to dig our heels in and hold the position, those 10%/29% losses would have turned into 67%/75% losses. Instead of losing $41,000 (based on today's sale price) we lost $13,500 across the two trades, a $27,500 difference. No loss is celebrated, but loss avoidance has the same impact as gain realization when it comes to the value of one's portfolio. Our final sale this morning represented a 60% loss, albeit on a small piece of the position.

To recall, we trimmed roughly one-third of the position last February at $46 a share in order to take advantage of the stock's 15% post-4Q 2014 earnings results (at that point, shares were about 5% below our cost basis). To quote our bulletin: "Given the volatility inherent to this name, we feel comfortable paring our position on the recent strength. We are still interested in holding on to a small position as the latest results and guidance reaffirmed our fundamental thesis, but we also are aware of the risks associated with owning such a volatile and unpredictable Internet name."

We would have exited the position entirely at $46 a share; our recognition of risks were offset by our inclination to see if the company could build off its fourth- quarter momentum and accelerate growth through 2015.

We owned Twitter heading into the second-quarter earnings season last year and had cautious optimism as everyone appeared on board with the company's ability to monetize an incredibly fast-growing, major-market opportunity platform that had taken social media by storm. We even gave the company the benefit of the doubt when CEO Dick Costolo -- a man so in over his head -- stepped down.

Yet, the moment we saw Jack Dorsey and his management team act in defiant arrogance during their second-quarter conference call after reporting horrid results that sent shares plummeting, we recognized that we were willing to eat a loss in order to protect members from what had the makings of a drawn-out death spiral.

To quote our disbelief, we said: "How can Twitter say that nothing is wrong? In its most recent quarter, the company missed on advertising revenue and earnings while simultaneously guiding below Street expectations for the second quarter. Commentary from the conference call implied monthly active user (MAU) trends were soft heading into the upcoming quarter. Revenue growth experienced a major deceleration. In simple economic terms: Demand is lagging supply. Twitter is not currently delivering enough clicks or engagement to many advertisers to warrant those advertisers increasing spending on Twitter or adjusting quality scores to allow for larger budgets."

Our subsequent trade alert was the second time we trimmed the position. We wrote at the time: "While it could be argued that the stock is cheap ... we're not sure what could possibly contain the downside going forward. Absent a complete shift in management's messaging, this company will struggle to regain investors' trust. From everything we've seen or heard, Twitter is in a state of disarray right now, making us believe that it will take a village to turn this ship around. We view a takeover as highly unlikely at this point, and do not want to miss an opportunity to protect ourselves from further downside."

Fast-forward one year and the only change has been negative: incessant waves of executive turnover, high- profile product flops, botched guidance and decelerating results. Since our June 30 note, shares have nearly been cut in half.

Bottom line: Protecting a portfolio from losses is just as important as realizing gains.

Shares have experienced a dead-cat bounce off a broken trampoline, allowing us the opportunity to finally exit unrestricted. Whenever we are asked about owning a stock for the takeover value, our response remains the same: Own it for the fundamentals, not the speculation. Twitter is void of fundamentals and anyone who has listened to the hundreds of takeover speculation alerts has been sorely disappointed (and lost fistfuls of money in the process). With shares comprising about a paltry 0.4% of our portfolio, we are following through on our intent to "sweep the remaining shares out on any dead-cat bounce." The saga has ended. We exit without pride but with humility, the latter of which allowed us to avoid getting slaughtered.

At the time of publication, Action Alerts PLUS had no positions in the stocks mentioned.