How to sell your way to a better portfolio
To keep your portfolio in profitable trim, you have to do some timely selling, says this U.S. advisory, which finds replacements for two stocks.
Selling stocks isn’t easy, either way.
It’s hard to let go of a winning stock, but selling a loser looks like an admission of defeat.
Yet you may have to do both if you want your investment portfolio to keep on generating the best possible returns.
In effect, the whole is greater than its parts, no matter how well some of them have done in the past, says one leading Wall Street advisory.
Dow Theory Forecasts advises subscribers to stick with 12 to 15 of the top stocks on its list. That means selling stocks that have fallen back.
For the advisory itself, it also means cutting bait with stocks it once heartily endorsed. In a sense this is simple. The advisory’s patented stock picking system is grounded in a set of specific criteria.
Either the figures add up, or they don’t.
Still, it’s not always pleasant to turn your back on two stocks that were recently recommended, as the advisory does in this issue.
But it does mean that stocks are always moving up to take their place. As a rule, they will come from the sectors that are moving ahead.
Love it or leave it
The advisory can advise people to drop a stock that’s no longer on its Focus Buy List. Still, it recognizes that “selling a winner requires an open-mindedness that can be hard to find when things are going well, while selling a loser means admitting a mistake.”
Nor is it easy for the advisory. “And because selling just before a stock rallies is so aggravating, fear of potential remorse (and subscriber anger) can make selling even more difficult for newsletter editors.”
This advisory has a big Buy List of 38 stocks, while its Focus List (best buys for the next 12 months) is much smaller — 14 stocks at the moment.
“Our Buy List also takes a love-it-or-leave-it approach, but the tight limit on the number of Focus List stocks makes it especially sensitive to our stock-market view,” adds the advisory.
This is why the Focus List no longer had room for two tech stocks.
Too optimistic
No sector has more stocks with high scores in the advisory’s stock picking system than the technology sector.
“But semiconductors, semiconductor equipment, technology distributors, and other cyclical tech groups have seen average Momentum and Earnings Estimates scores drop since earnings season began around April 6,” notes the advisory, “suggesting expectations for the groups have become too optimistic.”
Two stocks bear the brunt of these overripe expectations. Both of them received enthusiastic recommendations just a month ago, as we reported (see Daily Buy-Sell Adviser, April 19).
But semiconductor equipment maker Lam Research (NASDQ-LRCX) has been dropped right off the advisory’s charts. It is no longer a Focus Buy, no longer on the Buy List, or even on the Monitored List.
This harsh treatment is the result of disappointing guidance from the company, which projects year-to-year declines for the next two quarters. The advisory had hoped that its discount valuation would stand it in good stead, but “discouraging guidance from several rival semiconductor-equipment players has undermined our confidence.”
Indeed the stock has lost almost four dollars over the past month or so, trading at $47.42, with no dividend.
Texas Instruments (NYSE-TXN) fares a little better. Although it is no longer on the Focus List or the larger Buy List, it remains a Long-Term Buy, “largely because it seems cheap and its long-term growth prospects seem intact.” Nonetheless, this well-known semiconductor giant has deteriorating profit estimates for the next two quarters.
The shares have gained a bit in the past month and trade at $35.25, yielding 1.5 per cent on a dividend of $0.52.
More health care
If the advisory felt it had to get lighter in the tech sector, it may be a bit too light in health care, it reckons. Health care stocks have the best score of any sector in its ranking system.
At the moment, Agilent Technologies (NYSE-A) is the only stock of its kind on the Focus List, and it’s really a tech stock that serves the health care industry.
Calling itself “a measurement company,” it specializes in life sciences and chemical analysis, among others. The stock has been rising steadily, hitting a 52-week high last week at $55.32, then sliding back with the markets to $52.60 today. There is no dividend.
The advisory also likes Bard (NYSE-BCR), which makes vascular, urology, oncology and surgical products. But its price has been rising and it seems fully valued at $109.80, yielding 0.7 per cent on its $0.72 dividend. It remains on the big Buy List, but a pullback in price might get it promoted to the Focus List, suggests the advisory.
Energy is a rising industry with the third best score among sectors. And the advisory has just added a new stock to its Focus List. Walter Energy (NYSE-WLT) is not on the oil and gas side of the industry. It extracts metallurgical coal in Alabama and is building up its Asian markets with a new acquisition.
Its production and the cost of coal are going up at the same time. Walter is not cheap — it trades at $121.55 — but it’s a Buy, a Long-Term Buy and now a Focus List Buy. It yields 0.4 per cent on a $0.50 dividend.
On the other hand, don’t ignore a weak sector if it has a strong stock to offer. Finance is floundering, especially the big U.S. banks. But one stands head and shoulders above the rest, says the advisory. J.P. Morgan Chase (NYSE-JPM) scores very well in its ranking system.
Its shares are also down a bit in the turbulent markets of the past few weeks, but they have made considerable gains since last year. Today they trade at $43.33 with a yield of 2.3 per cent on the $1.00 dividend.
It would be nice if you bought a group of stocks that could just keep on churning out profits. But to keep your portfolio humming, says this advisory, a timely sell is just as important as a timely buy.
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