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2 shares I bought after selling my Slater & Gordon Limited shares

Following the release of Slater & Gordon Limited’s (ASX: SGH) first half FY16 results, there was only one thing to do – sell the shares as soon as possible.

Some people will without a doubt say: “What were you thinking? You should not have been invested there in the first place!”

And while these people are definitely right in hindsight, every investor will make a bad decision at some point in their journey.

This was definitely one of my biggest mistakes – I had an average cost price of $1.35 and sold my shares for 55 cents – a loss of around 60%!

Despite this, I am happy to be out of the stock now and have taken some important lessons from the disaster that has been Slater & Gordon.

Perhaps the three most important lessons to take out from this saga are:

  1. Pay very close attention to cash flows.
  2. Avoid companies that are highly geared.
  3. Never trust management that destroy shareholder capital.

Lesson three is important because it wasn’t so long ago that Slater & Gordon raised $890 million in capital from shareholders that has now vanished into thin air.

I incorrectly put my faith in the management team that they could turn the ship around, but it is looking more likely that the law firm might struggle to keep its doors open beyond the next 12 months.

Rather than being stuck in the stock and hoping for a miraculous recovery, I used the proceeds from the sale and bought these two shares instead:

  1. Cash Converters International Ltd (ASX: CCV) – Cash Converters has been a difficult stock for the past 12 months but it appears management is taking steps to address some of the issues that have been creating a drag on the share price. Importantly, the company has successfully found a replacement banker after Westpac Banking Corp (ASX: WBC) pulled out of its funding agreement with the company. Cash Converters is also winding down operations in its two poorly performing divisions, the UK and Carboodle, and will instead focus its resources on its very successful Australian operations. Investors should note regulatory concerns still linger over Cash Converters and until these are completely resolved the share price is unlikely to trade with a great deal of momentum. Despite this, the company delivered a solid first half result and re-instated its dividend. As a result, I was happy to pick up a parcel of shares at 49 cents.
  2. Macquarie Group Ltd (ASX: MQG) – Shares of Macquarie have significantly underperformed the broader market since the start of 2016 and have lost around 20% for the year to date. The market was left somewhat underwhelmed by Macquarie’s third quarter trading update, but importantly the company remains on track to deliver an improved performance compared to FY15. As a result, the shares appear undervalued and I was happy to add to my holdings at around $65 a share. On top of premier exposure to global markets and a leading asset manager, investors will also benefit from a dividend that is expected to grow and currently yields more than 5.5%.

Foolish takeaway

It can be tempting to hang on to losers in the hope of a turnaround but investors need to consider the opportunity cost of not moving on.

All investors make mistakes but it is never to late to learn from them and move on to bigger and better things.

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Motley Fool contributor Christopher Georges owns shares of Cash Converters and Macquarie Group. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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