I have decided to hold onto my Costa Group Holdings Ltd (ASX: CGC) shares.
Costa has been very disappointing during 2019 with its share price down 72%, and 23% today – ouch.
Multiple earnings downgrades have been like a slow motion car crash and hurt investor sentiment.
Costa is experiencing simultaneous problems with nearly all of its produce segments. Mushrooms, citrus, berries and avocados are not as good as (lower) expectations, although tomatoes continue to do fairly well. Extreme weather is having a tough impact.
Drought conditions are causing increased water consumption by the crops, with water costs higher, and it's hurting the yield and fruit size. It's a real bad case scenario.
It also seems like a poor decision by Costa leadership to have paid the recent dividend if it were going to go to the market for money at a heavily discounted price a few months later to reduce debt.
Having to raise capital at this stage is a painful and permanent reduction of earnings per share (EPS) for existing shareholders.
The Australian Financial Review reported comments by co-founder Frank Costa, who said Costa was partly to blame on the food price side of things because it expanded too much, causing oversupply in blueberries and mushrooms. He said "We're probably one of the worst bloody culprits. When supply is huge then things go south."
In hindsight, there have been some mistakes made by Costa leadership, which is one of the main reasons why I was thinking of selling shares.
Mr Costa has said he will not be taking up his entitlement. That's my own personal position as well, I don't think I will be either.
However, I'm not going to sell my shares. Costa is a lot more cyclical than what it made out to be. And this appears to be in a bad part of the cycle. If I sold now I'd be selling at a low point of the cycle, perhaps selling out of fear of the situation.
Costa's earnings and share price may not have hit absolute bottom, but it may not be the average conditions over the next 10 years either. If these conditions are normal then it's quite likely food prices will go up to compensate and Costa could be best placed to survive due to its size. If weather conditions get better then Costa should recover too.
The entire farming community has been surprised and rocked by how tough the drought has been.
Foolish takeaway
Costa is not going to generate the consistent growth that we see from shares like Altium Limited (ASX: ALU), Microsoft or Alphabet, or the strong returns on equity (ROE) of other businesses. However, there is a fair chance that Costa could be facing its low point like BHP Group Ltd (ASX: BHP) did in 2016 when things looked rough.
It was not an easy decision to keep holding shares. The drought could get worse and climate change could cause these conditions to persist for a long time, but I'm personally going to keep holding.
