Toss These 3 Stocks Out With the Trash

Twice a year, I look through my mother's portfolio and examine each stock to see whether it makes the cut. Today, I'm going to let you in on two classic examples of stocks I'm considering selling, then provide data on three stocks you might want to toss out with the trash.

And because most of the time, I like to replace a bad stock with a good one, I'll also give you free access to what The Motley Fool believes is the best stock for 2011.

It's rebalancing time!
Rebalancing is one of the most important things you can do for your portfolio. Over any given year, the stock market may drastically move up or down, which can greatly alter your balance of stocks versus fixed-income investments.

Last week, while checking my mom's portfolio, I realized I needed to add more bonds to her holdings to maintain the 60%/40% mix that I prefer. In doing so, I also analyzed each of her individual stocks, and found two that I think might deserve to get the axe -- for very different reasons.

Hasbro (NYSE: HAS  )
I bought this stock for my mom in July 2009, when it was trading for a dirt cheap $25. The recession was in full swing, and no one expected a toy company to do well while consumers were tightening their belts. Yet I felt that Hasbro was superior to major competitor Mattel, and I was really enthusiastic about its potential joint venture with Discovery to unveil its own children's network, "The Hub." With shows that showcased its action heroes and other popular toys, I thought the Hub would be a great, but expensive, value-add for the company.

Since that time, Hasbro's stock price has gone up by about 90%, outpacing the market by more than 35%. Although it's early in the game, The Hub hasn't exactly wowed viewers, and it's still lagging Disney and the Cartoon Network significantly. In addition, trading for more than 18 times trailing earnings and way above its five-year historical average, I think the stock is a bit overvalued now. For those reasons, I'm thinking about trading in this great stock -- a true winner -- and finding another home run instead.

Smart Balance (Nasdaq: SMBL  )
I purchased this company as one of a few "growth" stocks that I like to keep in my mom's portfolio. Although it was expensive, I based my purchase mainly on Smart Balance's dominance in the buttery spreads category, and the potential for its enhanced milk. Since that time, the stock has dropped by 13%, spread sales have declined, and its overall market share has decreased by 0.50% in the most recent quarter. On top of that, it doesn't seem that the company's milk product is exactly taking off. For those reasons, I'm putting Smart Balance on the chopping block.

You've got to take a long-term approach
Now, I'm not saying every time your stock drops or a company runs into a problem, you should head for the hills. You simply have to evaluate the performance you expect over the long run.

Investors in Sirius XM (Nasdaq: SIRI  ) know this well. Short-sellers have been vocal about this stock for years, yelling at the top of their lungs that this was a trash stock with too much debt, and a service that would be displaced by competitors. However, investors who hung in there have seen gains of 120% over the last year. Obviously, they believed in the fundamentals of the business and the product, and their faith paid off.

I don't consider the stocks below "trash." Instead, they've all seen pretty good run-ups over the last year, they're trading at fairly lofty valuations -- and they're projected to decrease their earnings in the year ahead.

Company

% Price Change (1-Year)

Trailing P/E

1-Year Estimated EPS Growth (Normalized)

Golar LNG (Nasdaq: GLNG  ) 187% 110 (17%)
Hypercom (NYSE: HYC  ) 97% 204 (31%)
Dril-Quip (NYSE: DRQ  ) 57% 28 (5%)

Source: Capital IQ, a division of Standard & Poor's.

Like I said, these three stocks aren't all necessarily duds -- but you might want to consider my Hasbro example, and take your money and run.

For instance, Hypercom, a company that provides the electronic swipe machines for credit cards, has seen a massive run-up over the last year as Visa and MasterCard illustrated that their services aren't going obsolete anytime soon. However, VeriFone Systems (NYSE: PAY  ) recently got blocked by the Department of Justice from purchasing Hypercom because of antitrust issues -- never a good sign. Shares have declined since the news, and free cash flow was down last quarter, as well as gross and operating margins. Depending on what your long-term thesis is for this stock, it could be a great time to collect that cash and make a run for the door.

One for the road
Before I make what I consider to be a substantial decision and sell a stock from my mother's portfolio, I like to have at least one or two that I can buy, so that I don't leave her idle cash sitting around. Typically, these are stocks that I've been watching for some time.

Do yourself a favor and take a good look at your portfolio: Are there stocks you could sell? Are there better opportunities out there? It's never too late to cut the cord on a stock if you no longer believe in it. But before you do, make sure you read this awesome, free report: "The Motley Fool's Top Stock for 2011." According to our analysts, this stock is essential to "revolutionary new technologies," and "now is the perfect time to invest." If our report doesn't make you want to buy the stock immediately, at least you have a great investment to put on your own personal watchlist!

Jordan DiPietro owns shares of Hasbro and Smart Balance. Motley Fool newsletter services have recommended buying shares of Visa, Hasbro, and Walt Disney, and in a different service, shorting Hasbro. Try any of our Foolish newsletter services free for 30 days. 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.


Read/Post Comments (14) | Recommend This Article (74)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 10, 2011, at 1:55 PM, KKFR3677 wrote:

    Hello Motley,

    You succeeded in throwing the baby out with the bath water. Clearly from the content of the article

    you dont consider SIRI trash to be thrown. If that is true why include it under the heading 3 to throw

    out??? The article only details three stocks of which SIRI is given a positive appraisal. You must

    realize that many will assume that SIRI is the third

    to trash and mistakenly throw it under the bus. You must consider the impact of a contradictory and confusing inclusion of SIRI under this heading!

  • Report this Comment On June 10, 2011, at 3:52 PM, jekoslosky wrote:

    I've enjoyed the same great gains on Hasbro. But I still like the stock. CEO just bought about a half-million in shares at $44.85, about 5% above the current price. I might consider trimming my position a bit. But I think I'll stick in there on this one.

    stocksnovice.blogspot.com

  • Report this Comment On June 10, 2011, at 5:29 PM, TMFPhillyDot wrote:

    @jekoslosky,

    Yeah -- to be honest, I've thought about trading Hasbro a few times and haven't pulled the trigger. Every time I'm about to trade, it continues to inch higher; although, to be honest, I think it might be reaching its ceiling. I guess we'll see.

    Good luck to you!

    Best,

    Jordan (TMFPhillyDot)

  • Report this Comment On June 10, 2011, at 6:30 PM, 1ferthemoney wrote:

    with many new model vehicles standard with sirius radio, and for two bucks a share i'll just keep mine thanks

  • Report this Comment On June 10, 2011, at 6:44 PM, AcheronRecords wrote:

    I wouldn't throw HAS out with the trash. I bought in at $31.30. I think the stock has a lot of room to run.

    I find the best comparison to them is Mavel and not Mattel. Hasbro just makes toys when Marvel made comics. The real upside to Marvel was the licensing revenues from allowing other companies to make video games, toys, clothing, etc.

    Hasbro has a smaller library of characters of Marvel, but with GI Joe and Transformers already in the movie and TV business it attracts more attention to their products and opens up opportunities for licensing. Also they still have more movies and shows in the works such as Stretch Armstrong, Battleship, Monopoly, Clue, Candyland, and Ouija.

    Plus I've been seeing a ton of Hasbro board games being produced by EA for iPhone and Android.

    If Hasbro can continue to leverage their own brands and rely less on licensing other brands from Disney, Nickelodeon, and others than they have a long way to run up.

    Also there is always the chance they could be acquired for 27 P/E like Marvel was in 2009 by Disney. That leaves a nice run of 50% ahead of them. I'll take my chances and hold on to the stock and maybe even pick someone else's trash.

  • Report this Comment On June 10, 2011, at 7:40 PM, samedge2 wrote:

    You've got to love how any time a SIRI reference is even LISTED on a site - trolls investors come out and assume the stock is being bashed.

    The reason Sirius-XM will not succeed is because radio is a dying medium. I read that the 12-19 y/o demographic listened to the radio 50% less between '00-'10 versus the previous generation.

    Also, has anyone actually checked the book value of Sirius-XM? It's FIVE CENTS with a current P/E of 600+. So your book/market, at $2/share, is 40:1. There's a reason it's so cheap.

    The only hope investors have for that stock is that they're bought out and incorporated into a media conglomerate at some point. Otherwise - kiss that money goodbye within 5-7 years.

  • Report this Comment On June 10, 2011, at 8:47 PM, Langalier wrote:

    I don't see Ford on the list. It's been a loser for me...

  • Report this Comment On June 11, 2011, at 2:04 AM, akbarcaskey678 wrote:

    The reason SIRI will succeed is because the radio is dying. It is dying because the radio is not custom to the listener . SIRI customizes what the listener hears which is why it will succeed. Its like cable for radio.

  • Report this Comment On June 11, 2011, at 2:10 AM, OutperformOrDie wrote:

    Jordon,

    You're brave to say anything even slightly negative about SIRI on this site!

    ...

    I bought SMBL about two years back and I'm down roughly 8%. During this time they've managed to grow sales, albeit slowly in the low single digits, but not nearly as much as Stephen Hughes had hoped.

    I think I'll hold on. Every time I inch to sell, I imagine SMBL being bought out by KFT or some other big food company and I cringe at wondering if I would miss out on a great acquisition. Guess we'll have to wait and see. Good luck!

  • Report this Comment On June 11, 2011, at 11:54 AM, MonsterFluff wrote:

    Jordan

    Where did the guidance for negative earnings for DRQ come from?

    Q1 was 54¢

    Q2 guided to 50¢-60¢

    Are they losing more than $1.04 in the back half?

    DRQ does not do CCs so would like to see the reference

    thx

  • Report this Comment On June 11, 2011, at 6:01 PM, davidm8797 wrote:

    Sirius and all other forms of "Satellite" radio are a failed social experiment. Smartphones rule all things music in the car, at home, and abroad. No one needs to for a box to put in their car so they can listen to Howard Stern do unthinkable things to pron stars. It's garbage, a haven for bottomfeeders. Pandora all the way

  • Report this Comment On June 13, 2011, at 10:42 AM, DanielLong wrote:

    SIRI should be thrown out with the trash, and it is by no means "Cheap". Just because it went from under a buck to 2 bucks does not make it a good stock. The problem w/ SIRI is the enormous share count of 3 billion, still just don't get that. I'm supposed to believe the stock will go to ten dollars and be worth 30 Billion dollars, not likley. The only way the stock goes anywhere from here is via reverse split. http://bit.ly/mhfbyn

  • Report this Comment On June 13, 2011, at 11:22 AM, rtichy wrote:

    <i>"I don't consider the stocks below "trash." Instead, they've all seen pretty good run-ups over the last year, they're trading at fairly lofty valuations -- and they're projected to book negative earnings in the year ahead."</i>

    What data or facts backs up this assertion? The table below certainly does not. The table below says the companies will have "negative earnings growth", not "negative earnings". And if these are the 3 companies for the headline teaser, you either don't know much or say much about the 3 of them.

  • Report this Comment On September 13, 2014, at 10:42 PM, bob494939 wrote:

    Regarding DePietro's advice on deferring retirement past 62 to get increased SS benefits in case you happen to live to 90 or so. I heartily disagree. I retired at 55 and took early SS at 62. I travelled to follow my dreams including month long himalaya treks and outdoor trips to Alaska and South America and leaned to really powder ski. I bought a boat and cruised the inside passage. This is not intended to be bragging, just an explanation of what I did because I was physically fit AT THAT AGE and left the corporate management world to follow my dreams. Now, I am 74, still active however have had three bouts of cancer and god knows what else I won't mention. A word to the wise. Don't wait. You'll figure out how to do it financially.

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