How to Sell Your Stocks Smarter
Examples of Three Profit-Taking Sells
The best time to buy Apple (AAPL) was in 2003 after the Internet Bubble had burst and technology stocks were treated like dirt. Of course, no one wanted AAPL back in 2003, but in the 13 years that followed, the stock soared 9,400%.
The best time to sell AAPL was in mid-2012, when AAPL became the world’s most valuable company. Everybody wanted the stock then (as well as the company’s products), but the sad truth is that AAPL has underperformed the market since; you would have done better owning the S&P500. And this year, AAPL has really fallen apart; it’s now 28% off last year’s high!
In short, doing the opposite (just like George on Seinfeld) is often a very smart move in the market … and in real life.
Which brings me to Zika. Recent weeks have brought a slew of scary headlines about Zika, the virus that takes its name from the forest in Uganda where it was first identified in 1947.
There’s a possibility (but no certainty) that Zika is a cause of microcephaly. Also, there’s possibility (but no certainty) that microcephaly might be on the increase in Brazil; it’s hard to know because they keep changing the definition.
So, while there’s no proof of anything, there is a lot of fear, stoked by a lot of heat but very little light. Combined with people’s natural attraction to scare stories (and their general innumeracy), it’s resulted in a slew of Brazilian trip cancellations and even fears that the Olympics, scheduled for August, will be affected.
I say get a grip. There are far bigger risks in your life—even if you are traveling to Brazil—than Zika. These include heart disease, cancer, getting in an automobile accident, diabetes and holding losing stocks far too long.
The first four I can’t help you with. The fifth, I can.
How to Sell Your Stocks Smarter
In brief, the way to avoid holding losers too long is to follow these two rules.
Always consider selling your weakest performer (and replacing it with something stronger).
Always consider selling your biggest loser (and replacing it with something stronger).
It’s not rocket science, but it does take discipline. It’s far too easy (and as human as fearing Zika) to hold on, arguing that the original reason for owning the stock is still valid, than to face the music and admit that your investment just isn’t working out.
But there’s no sin in being wrong in the market, the sin is in staying wrong!
Today, by following these two simple rules—and buying a diversified group of stocks originally recommend by other Cabot analysts—my Cabot Stock of the Month portfolio consisting of seven stocks has an average profit of 73%. There are two losers—not hard to believe after the market’s recent action—but those losses are fairly small (3% and 12%) and if those stocks don’t shape up soon, I’ll cut them lose!
For more information on how you can follow this simple yet effective portfolio, click here.
Examples of Three Profit-Taking Sells
Above, I wrote about my policy of cutting losses short, which is a good way to ensure that your portfolio holds mostly winners.
But selling winners is also important, and below I want to show you some recent examples of profit-making sells by Crista Huff, lead analyst of Smart Investing in Turbulent Times, our newest investment advisory.
On November 6 of last year, Crista wrote to her readers:
“I featured Bank of New York Mellon (BK) in the Buy Low Opportunities Portfolio in the inaugural issue of Smart Investing in Turbulent Times.
Shortly thereafter, Wall Street's consensus earnings estimates decreased for BK. Therefore, on October 12, I changed my rating on BK from Buy to Hold, writing, "the chart indicates that the stock appears poised for additional near-term capital gains."
Then on October 26, I wrote, "The stock is actively climbing toward 45, at which point it will assuredly pull back and trade sideways, largely because there's no earnings catalyst on the horizon to push it higher. I would put in a sell order at 44.50 ...”
Today, the stock reached 44.50. Therefore, I will sell BK from the Buy Low Opportunities Portfolio today, representing an approximate 11% total return in 31 days (including one dividend!).
While I absolutely believe that financial stocks are approaching a bullish time period in U.S. stock markets, BK is not the one I would own for that run-up, because it's already fully-valued based on fundamental analysis. I will be ready to recommend an undervalued financial growth stock for you the moment one of them appears ripe for capital gains.”
Note: BK is now down 22% from that sell point. Great Sell!
On November 30, Crista wrote to her readers:
“Sell: Abercrombie & Fitch (ANF)
I recently reported on a big third-quarter earnings surprise at fashion clothing retailer Abercrombie & Fitch (ANF). The stock reacted with a huge run-up.
ANF is up 21% since joining the Growth & Income Portfolio three weeks ago. Now that we have had big changes in EPS, P/E and share price, the stock is no longer an undervalued bargain. Therefore, I'm selling the stock from the portfolio today.
I'd like to reiterate that there's nothing wrong with ANF. Buy-and-hold investors still own a growth stock with a big dividend. If you rarely sell stocks out of your portfolio, then by all means, hold onto ANF.
It's entirely likely that I'll put a Buy rating on ANF again, if the price falls back down to 22. Stay tuned!
Congratulations on a big short-term gain! Let's keep that money moving by investing in a more undervalued stock.”
Note: More then two months later, ANF has gone nowhere. It’s right where it was at the end of November. Great Sell!
Most recently, on January 29, Crista wrote to her readers:
“This morning, Westlake Chemical (WLK) announced that it made an offer to buy chemical and building products company and Buy Low Opportunities Portfolio holding Axiall (AXLL) for $1.4 billion, valued at approximately $20 per share. Axiall rejected the offer.
AXLL is up $7.32 this morning at a share price of 17.12.
Please hold your AXLL shares. We often see a second, higher purchase offer materialize in the coming days. There's no reason to make a quick decision on how to proceed with your stock.
Next week, in the February issue of Smart Investing in Turbulent Times, I'll talk to you about how to handle merger & acquisition scenarios, using real-life examples of famous companies. In the interim, it's not too late to send me questions on that topic, so that I can answer them in the February issue.”
Note: Since then, AXLL has been climbing day by day, approaching Westlake’s offer of $20 per share.
You could still buy AXLL here—after all it’s got positive momentum, and it’s “in play”—but I strongly suggest that a wiser move is to get on board Crista’s next bargain-priced recommendation by becoming one of her regular readers. For details, click here.
Yours in pursuit of wisdom and wealth,
Publisher, Cabot Wealth Advisory