Sell That, Buy This

Is your portfolio optimized?

If you're being honest, you should be shaking your head. There is no such thing as a perfect collection of stocks.

This is not to say that shareholders should be perpetually rebalancing their holdings. That only leads to tossing and turning at night for you -- and fatter commissions for your broker. However, investors should make a habit -- once a quarter should do the trick -- of stacking their stocks against possible replacements.

An unbiased approach may result in faster-growing stocks, more attractive valuations, or more effective choices for your portfolio. Need proof? I've rounded up three examples to get you going.

Sell Lowe's, buy Lumber Liquidators
Lowe's (NYSE: LOW  ) was the thinking investor's play on home-improvement retail a decade ago. The superstore's bright lighting, clean aisles, and commitment to customer service opened up the niche to a female audience who'd tired of orange aprons.

These days, shoppers want a good deal, which is just what Lumber Liquidators (NYSE: LL  ) offers. True to its name, this fast-growing chain primarily sells wood flooring at deep discounts.

The woozy real estate market has prompted folks to stay in their homes whenever possible. Replacing shag carpeting or chipped tiles with hardwood planks or resistant laminates is a cost-effective upgrade.

Sales at Lowe's fell 2% last year, on a 6.7% slide at comparable stores. Earnings fell a steep 19%. Lowe's is also too big to be taken seriously as a growth stock. It may be adding 40 to 45 new storefronts this year, but that's just a 2% improvement on its square footage, given its current base of 1,710 superstores.

Lumber Liquidators, on the other hand, plans to add 36 to 40 new stores this year, atop a year-end count of just 186 small-box stores.

It goes without saying that 2009 was markedly better for Lumber Liquidators than for Lowe's. Sales grew by 13% on flat comps. Earnings actually expanded, climbing 18% during the year. Lumber Liquidators may trade for a slightly higher earnings multiple -- 23, versus 17 for Lowe's, based on this year's analyst estimates -- but it's clearly more than worth the premium.

Sell GameStop, buy Perfect World
The video-game industry has been roughed up over the past year, and leading retailer GameStop (NYSE: GME  ) has the battle scars to prove it. Earnings dipped, comps tanked, and only breakneck expansion has kept the top line from falling as well.

GameStop is painting a rosy picture for the year ahead. But it's hard to get excited about physical distribution as console makers beef up their digital marketplaces, and casual gamers migrate to smartphone and social-networking diversions.

In contrast, Perfect World (Nasdaq: PWRD  ) quite literally occupies a perfect world. Online gaming is booming in China, and the company just wrapped up its fiscal year with 49% in revenue growth and a heartier 60% advance on the bottom line.

Perfect World trades for 10 times earnings based on next year's targets -- about the same as GameStop's multiple of 8. You tell me which company makes the better buy.

Sell Starbucks, buy Green Mountain
There's no shortage of Starbucks (Nasdaq: SBUX  ) fans around Fooldom, so this one may not be a popular call. However, I'm still not sold on the java giant's turnaround. Yes, I know that earnings exploded in Starbucks' latest quarter, but only when compared to the prior year's depressed levels. Total sales rose a mere 4%, even including the introduction of VIA instant coffee and in-store price increases.

Meanwhile, at Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , sales and profits soared 77% and 163% respectively during the same three months. The company sold a record 1.5 million Keurig single-cup brewers, boding well for growth prospects beyond the 650 million K-Cup refills that shipped during the period.

Starbucks may be threatened by the rapid rollout of cheaper lattes and iced coffee drinks at McDonald's (NYSE: MCD  ) . But Green Mountain represents an even cheaper and more convenient option, as Keurig machines pop up in more homes and offices.

Green Mountain is a lot more expensive than Starbucks by nearly every metric, but its caffeinated growth makes it hard to ignore.

It's all about the optimization
As a member of the analyst team for the Motley Fool Rule Breakers newsletter service, I should point out that all three of the replacement stocks in this column are active recommendations.

This doesn't mean they'll always be part of our roster. Disruptors get disrupted, and dozens of promising stocks have been dumped from the newsletter's scorecard over the years when their fundamentals start to lag their valuations. Active monitoring -- and optimization -- is at the heart of any newsletter service that values its financial performance.

Now it's your turn. The next time you have some time on your hands, go over each and every investment you own. Is your original buy thesis intact? Does a related stock stand a better chance to appreciate in the future?

"Buy and sell," as a strategy, only works for investors who aren't willing to settle. Is your portfolio optimized? We both know the answer. Do something about it.

Join Rick and other optimization market-beaters for a free 30-day ride on the Rule Breakers newsletter service. Lumber Liquidators, Perfect World, and Green Mountain Coffee Roasters are active recommendations.

Longtime Fool contributor Rick Munarriz realizes that everything can be improved upon -- including this article. He does not own shares in any of the stocks mentioned. Lowe's is a Motley Fool Inside Value selection. Starbucks is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended writing covered calls on GameStop. The Fool has a disclosure policy.