What to Sell in This Market

It's true that the market tsunami has left some dirt cheap value stocks in its wake, but if you don't have the cash to buy them, the opportunity will pass you by. Now is the time to go through your portfolio to see what you can sell to raise some cash.

Yes, many of your stocks are already trading for a loss, and yes, "buy high and sell low" is the exact opposite of how you're supposed to invest. But in today's market, selling weaker companies for a loss and reallocating the money to better investments is a sound strategy, for it will be the best-run companies that survive this storm and thrive when the market turns for the better.

At a time when you can find so many cheap stocks, it makes no sense to hold onto companies facing enormous headwinds just because they are discounted. So here are two investments to consider selling in this market and one idea for where to put your money.

Second-rate consumer services companies
With unemployment on the rise, credit-card companies slashing credit limits and raising rates, and one in six homeowners underwater on their mortgage, the U.S. consumer is in a bad place right now with no sign of recovery in the short run.

This isn't just a cyclical spending slowdown that will take months to work itself out, either. The $6.2 trillion in debt that U.S. households took out between 2000 and 2007 fueled much of the consumer-related growth we've experienced in the past decade -- on SUVs, flat-panel TVs, and granite countertops and other luxury goods. This massive debt burden will need to be paid down before a healthy recovery can occur.

To achieve this, households will be saving more and spending less. More importantly, when they do spend they will not only be more price-conscious but more selective about where they choose to do their spending. Put simply, the stronger companies will survive, while the weaker ones will fall further. If you own the latter, they should be the first to sell from your portfolio.

While CVS Caremark (NYSE: CVS  ) , for example, is naturally suffering in this climate, its financial health has long been much better than that of its second-rate competitor, Rite Aid, which is mired in debt, is closing stores, and posting massive losses. The market will naturally punish inefficiently run businesses, and in this market, you don't want to be betting on the weak horse.

So, ask yourself, "Are the consumer stocks I own the best-in-class?" If you're not sure, look at their margins and sales growth versus competitors and the industry at large. Along these lines, I'd much rather back top-notch names such as Nike (NYSE: NKE  ) and Coach (NYSE: COH  ) with their 13% and 35% operating margins, respectively, than K-Swiss' 1% margin.

Companies with high debt and no free cash flow
Similarly, you want to get rid of companies with excess debt on their balance sheets and negative free cash flow. When sales and earnings are down, fixed costs like interest expenses and rent payments become even more pronounced. Without free cash flow generation, the company must burn through the cash on its balance sheet, sell assets, issue stock, or borrow even more money just to make do. This is not a winning formula.

Just look at what's become of Raser Technologies (NYSE: RZ  ) this year -- it's more than 75% off its 52-week high. The geothermal power developer hadn't generated any free cash flow in years and is today armed to the teeth with long-term debt -- to the tune of $80 million against just $284,000 in revenue. One of the company's solutions, announced in November, was to issue a private placement (not available to general public) of common shares to raise $20 million -- diluting existing shareholder value in the process. To a lesser extent, a similar story has played out at Palm (Nasdaq: PALM  ) over the past year, and the distressed company was handed a lifeline earlier this week in the form of a $100 million equity investment from Elevation Partners.

Bottom line: There's no reason to hold onto an over-leveraged company with no means of paying its debt other than at the expense of shareholders. If you own a company like this, consider selling it to free up cash.

What to buy
Even though selling for a loss may wound your pride -- no one likes to admit defeat -- you're better off sacrificing the battle to focus on winning the war. That means reallocating capital from poorly run companies facing extreme headwinds and putting it behind well-run companies with the wind at their back.

One industry you should consider putting money behind is health care, which will benefit from the aging of baby boomers in coming decades. And talk about timing -- this market has provided us with an opportunity to buy great health-care companies at great prices just as baby boomers enter retirement age. Sure, you can stock up on behemoths with hefty dividend yields such as Eli Lilly (NYSE: LLY  ) and Bristol-Myers Squibb (NYSE: BMY  ) , but there are also plenty of higher growth health-care companies trading at substantial discounts.

In a recent issue of Motley Fool Inside Value, the team named Quest Diagnostics a "great buy" now because:

It already benefits from the increased number of medical tests taken as we age, and that will only improve with the use of preventative measures to reduce health-care costs. Quest is a leader in innovative new tests, which carry higher profit margins. The company has paid down $435 million in debt so far this year, and it should pay down more over the next two years.

If you'd like to hear more about what the team thinks of Quest Diagnostics and other great places for newly freed-up cash, consider a free 30-day trial to Motley Fool Inside Value. To get started, please click here.

This article was originally published Nov. 21, 2008. It has been updated.

Todd Wenning congratulates his beloved Cincinnati Bengals on their recent win against that other Ohio team, the Browns. He does not own shares of any company mentioned. Eli Lilly is a Motley Fool Income Investor selection. Coach is a Motley Fool Stock Advisor recommendation. Quest Diagnostics is an Inside Value pick. The Fool's disclosure policy is more than a feeling.


Read/Post Comments (10) | Recommend This Article (8)

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 December 26, 2008, at 9:14 AM, TSIF wrote:

    Raising cash by selling current investentents is a true investor test when there are so many strong bargains available. Working through it is one of the hardest exercises an investor can do, (not just because of wour desire to "win"), especially if they believe their current investments took an undeserved beating. Rash decisions based on only a few metrics, however, can be unhealthy in the long run. I would agree with your article if one were trying to decide whre to put new money, but NOT from the premise of selling an investment that they have already researched. The better questions are what Motley Fool drills into us dailey. What has changed? Thre is more to a company than last years balance sheet. For example, my first take on Rasor, which coincidentally I drilled into just the last few days, was similar to yours. Negative cash flow is BAD, escpecially in this economy. Deeper homework, however, would tell you that if you are a patient investor with some risk tolerance that Raser is exactly where you want to be after it's beating. Coincidently, finding your article is very interesting, since I'm selling some investments that I don't think are to take off anytime soon balance my capital gains/losses AND to buy Rasor this morning.

  • Report this Comment On December 26, 2008, at 9:29 AM, aeronaut77 wrote:

    Selling Raser right now is a BAD idea. While it is true that the company has not produced any cash flow to speak of up to this point, that situation is changing within days. Their first geothermal plant is already up and running selling power to the local utility. In January power sales to the city of Anaheim begin. The next round of power purchase agreements to be announced will be at significantly increased prices for the power than Anaheim is paying. Eight or Nine more such plants will be completed during 2009 for net cash to Razer of about $65 Million.

    One thing that we don't do very well in the US is investing for the long haul. Creating a game changing company takes time. In 2009 Raser will demonstrate repeatedly and a geothermal plant can be built in a matter of months, not years, thus forever altering plant economics for the better.

    Everyone seems to forget or ignore the Transportation and Industrial side of Raser. It is also true that investor patience has been tried severely in this area. But Raser and FEV are jointly putting the finishing touches on a plug-in hybrid drivetrain for light trucks that will be used by at least one global automaker (widely believed to be Ford). The unveiling of a 100+ MPG truck is expected in Q1 2009.

    If anyone wants to sell their Raser stock for cheap, please let me know.

  • Report this Comment On December 26, 2008, at 10:11 AM, rkornfeld wrote:

    Motley Fool has continued to slam Raser. Enough is enough Mr. Wenning and the Fool. There is a clear bias on behalf of your publisher without any objectivity. Hence, no more credibility. If you did your due diligence, you would not have listed RZ as a stock to sell. As the other poster noted, there is why.

    This year RZ will go from a concept to a commercialization company. It will have at least 65 million in gross revenues and the prospects of much more in plant development. Here is how it will generate revenue:

    1. 5-8 new plants per year with a development construction time of 6 months per plant

    2. the largest geothermal reserves in the nation which will only allow it to have a bank of at least 2000 megawatts of development, 280 MGW of which is verified by an independent source at one sight alone.

    3. Taking this company on as soley geothermal, a conservative view, and ignoring the Plug in HEV, this company in 010 will make a net profit as there gross revenues double each year with plants coming on line.

    4. in 010 there revnues will double 09 and 011 triple the same

    You have missed the boat on this one and have failed to do your due diligence.

    Next time try not to take the company Fool line and dig deeper. Those who have are to be rewarded as geothermal runs 24-7 and does not have the problems and limited time to harness energey as solar, wind or whatever else with no problems as coal or nuclear.

  • Report this Comment On December 26, 2008, at 11:21 AM, TSIF wrote:

    As indicated at 9:14am, my buy order just kicked in on RZ. Thanks for pumping it down for me! I expect to look back on this a year or two from now and thank the fools who did their homework on this one, and smile at the fools who dump on the type of stocks that are great "fool" material for research. Research that requires more than just a spot look at a balance sheet. Might work on some long term stocks, but it doesn't work on those in transition. Some of these articles on Fools ar great, some are just "foolish". Fortuantely, the founders of this forum encourage us to do our own research, buy what we know, and hold on for the rides. Most of us should know geothermal, for those who don't they probably will some day.....cause it's hotter than....

  • Report this Comment On December 26, 2008, at 11:23 AM, harlydog wrote:

    To aeronaut77, raser's first geothermal plant is not up and running and selling power to the local utility. I am not sure why you would post this, it is provably false. Furthermore it is suppose to begin delivering 10MW to Anaheim by Dec of 08 and It looks like that will not happen. ( most PPA's have penalties for not delivering. Raser may have escaped this as it appears the PPA has no teeth in it.)

    While they talk about having another 8 or 9 plants up and running in 2009 it will most likely not happen as they do not have well fields developed to support the plants, nor do they have the cash on hand to develop the well fields. The only thing that truly has the potential to get up and running in 2009 is the New Mexico property, and that is not a sure bet.

    Do not confuse rasers power point presentation showing cash flow of $65 million (assuming 109MW of new power) with "net cash" to them (raser) of $65 million.

  • Report this Comment On December 26, 2008, at 1:28 PM, aeronaut77 wrote:

    To harleydog,

    Have you physically been to the Thermo plant recently? I have. The turbines are running and they're not just frying worms. On a temporary basis, the power is being sold to the local utility, probably Rocky Mountain Power.

  • Report this Comment On December 26, 2008, at 1:31 PM, TSIF wrote:

    http://finance.yahoo.com/news/Utah-startup-hits-geothermal-a...

    10MW plans upgraded to one of the largest in the world, due to go to Anaheim in weeks.

    VERY firm backing from investment firms, that while they lack credibility in this environment, aren't quite as likely to get burnt right now and lose any credibility they might have left.

  • Report this Comment On December 26, 2008, at 2:15 PM, harlydog wrote:

    aeronaut77, in my conversation with Mr Putnam earlier this week, I was told they are not selling any power. They are contractually obligated to deliver the power to Anaheim. Where did you get your information they are selling it locally?

  • Report this Comment On December 30, 2008, at 9:08 AM, aeronaut77 wrote:
  • Report this Comment On January 11, 2009, at 7:26 PM, TSIF wrote:

    I still disagree with the use of RZ in this article. PALM also had a nice run up. Fair warning that companies that are R&D intensive deserve more homework on deciding when to fold -em. Know what you buy.

    Examples of high debt/no cash flow companies that don't invest heavily in R&D would have made this point cleaner.

    Additional thoughts on my blog.

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=128774&t=0...

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