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.

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!