One Quality Stock to Sell Today

As we approach the one-year anniversary of the market bottom on March 9, 2009, it's high time to review our portfolios to consider which stocks we might sell.

The market has gained 63% since its nadir, and nearly all of the companies in the S&P 500 index have produced positive dividend-adjusted returns. If you had the fortitude to invest in just about any stock in those dark winter months, you're likely sitting on nice gains today.

What's more, those gains are now over a year old and qualify for the lower long-term capital gains tax rate. While some of your stocks will be worth holding longer, with market values harder to come by today, now may be the time to take some profits and raise cash.

But why?
If the two bubbles and bursts of the past decade taught us anything, it's that a profit is a true profit only when you sell. Many of us have seen paper gains vanish in just a matter of months because we simply held too long. Avoiding a repeat performance sounds easy enough, but deciding exactly what and when to sell is the challenge.

For one, you have enormous social pressure to keep holding during a rally. As former Citigroup CEO Chuck Prince told the Financial Times in 2007 about the private equity boom, "as long as the music is playing, you’ve got to get up and dance." It was psychologically easy to sell when everyone seemed pessimistic about the market in 2008 and 2009, but now that the market has rebounded, investors are once again putting money into equity mutual funds, and the tenor of news headlines has changed, the fear of selling too soon and missing more upside has become real once again.

At the end of the day, though, it's important to remember that the point of value investing is to buy 80-cent dollars and sell them for $1 or more. Only in extremely special situations will you sell 80-cent dollars for $10 and get to do a victory lap around your living-room computer.

Pruning the hedges
While lower-quality stocks with shaky balance sheets led the early part of the rally, a number of higher-quality names have picked up steam as the market recovery has matured and should also be considered for sale today. Warren Buffett, for instance, recently trimmed positions in high-quality companies like Procter & Gamble (NYSE: PG  ) , Johnson & Johnson (NYSE: JNJ  ) , and ConocoPhillips (NYSE: COP  ) to allow the Berkshire Hathaway (NYSE: BRK-B  ) portfolio room for other opportunities, even though he still believes in those stocks’ long-term upside.

It's in a similar vein that I suggest it's time to sell some of your Apple (Nasdaq: AAPL  ) shares, which are up nearly 150% over the past year, to explore other opportunities in the market.

For one, Apple doesn't have the high-growth potential it used to. After all, it is a $190 billion company, and a double in price from here would make it $70 billion larger than ExxonMobil (NYSE: XOM  ) and $130 billion bigger than Microsoft (Nasdaq: MSFT  ) today. Yes, it's possible, but it seems improbable -- at least anytime soon.

As any company grows larger, it becomes increasingly difficult to increase sales and profits at the same rate as in the past. For Apple to increase sales 10%, for instance, it needs to add about $4.7 billion in new sales this year. Again, it's possible, but it's certainly not easy to attract such gargantuan sums, and it won't get any easier as the company grows.

Nevertheless, the stock is priced as if the good times will continue, with the median analyst long-term earnings growth estimate at 18%, according to Capital IQ. The Wall Street bunch seems to have reached a consensus that Apple is a "buy" today, with 34 of 39 rating it either "buy" or "outperform" versus one "sell." Meanwhile, short interest has crept higher and is at its highest point since April 2009.

Again, none of this is to say that Apple doesn't have more good years ahead of it -- it's a quality stock with a stellar balance sheet, after all -- but if it makes up more than 10% of your portfolio after its run-up, it's time to take some of your capital out of the investment and reallocate it into other opportunities down the road.

Ring the register
In today's market, where just about every asset class has rallied over the past year, it's important to have some cash on hand in case the market drops a bit. There's simply no substitute for being able to pounce on great values; that means either adding fresh cash to your brokerage account or taking some profits from your winners.

The next step is to review each of your current positions and your valuation estimates. If a stock now exceeds your estimates and makes up a large portion of your portfolio, it's time to take some money off the table.

One stock our Motley Fool Inside Value team has expertly navigated since 2007 by sticking to its valuation estimates is Cimarex Energy (XEC), an oil and natural gas exploration and production company. The team first recommended the stock in February 2007 for $35; they sold in April 2008 for $63.15 -- a 79% gain. They then recommended Cimarex again in March 2009 at $24.31 and cashed in at $54.99 -- a 126% return -- in January. Sure, the stock's since increased to $60, but there's absolutely nothing wrong with locking in two very profitable trades.

To learn more about Inside Value's valuation methods and other recommendations, take a free 30-day trial of the service by clicking here. There's no obligation to subscribe.

Fool analyst Todd Wenning is living too much in '82 and owns shares of Procter & Gamble and Johnson & Johnson. Berkshire Hathaway and Microsoft are Motley Fool Inside Value recommendations. Apple and Berkshire Hathaway are Motley Fool Stock Advisor picks. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a buy calls position on Johnson & Johnson and a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway and Procter & Gamble and has a disclosure policy.


Read/Post Comments (25) | Recommend This Article (121)

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 March 04, 2010, at 1:35 PM, qcw wrote:

    Im not sure if the writer of the article is associated to The Fool, but if he is I find it frustrating that in content that is paid for sold by The Fool you would be recommending JNJ, yet this article is recommending differently.

    Now perhaps this is short term advise, and the other long term advise, Im not sure but it seems to represent a conflict of advice.

    I do make exception for these opposite forms of advise in say Dueling Fool articles as thats the purpose.

    So which is it, a good investment for 2 years, or not?

    I make my own decisions either way, but if The Fool is still there for Education it could be confusing to the new people.

    -Q

  • Report this Comment On March 04, 2010, at 1:57 PM, rbtrader wrote:

    I agree with the article. I think Apple has done a great job over the past few years. The iPhone, the Apple stores, the apps store, and the expansion into Europe and Asia have all added to the value of the stock. But as a wise investor advised me many years ago, take a look at the company every morning and ask yourself, "What is going to cause this stock to go higher? If you can't think of anything convincing, it may be time to sell, and look for the next rising star.

  • Report this Comment On March 04, 2010, at 5:00 PM, Zeos786 wrote:

    Doesn't Stock Advisor still list this as a Buy Now pick? A little confusing.

  • Report this Comment On March 04, 2010, at 5:09 PM, EquityBull wrote:

    Todd,

    You cannot look at a company and value its market cap based on other companies market caps. You have to value it based on free cash flow and balance sheet.

    Apple is trading at historically low PE (lower then before Jobs took the helm again) yet is growing in the recent quarter by 30% top line and much more on the bottom line. Typical valuation methods would value Apple with no less then a 25 PE and I believe the market will adjust the multiple for this juggernaut closer to its historical as well as current growth rate which would be 30 or more optimistically even 35. This yields a price on $12/share for 2010 of $300 at minimum. Optimistically apple may exceed the $12/share by a dollar or two and if it does and if it affords a cheery 35 market multiple you get $490/share.

    That said the low target based on typical Fool valuation methods and DCF models gets you at least $300/share.

    Buffett believes you don't need to water down your portfolio if you understand an investment. Big returns come from concentration in some great names and apple has few hurdles ahead.

    Potential patent lawsuits may shut down Android and any smartphone competitor who is stealing their tech. They have macs, iTunes ecosystem, ipods, iPad's, iPhone, app store. There are few companies you can compare to apple right now. It is one of the leading brands and most respected companies in the world now and for good reason.

    They have a CEO with great vision and ties into media companies as well as other high power places.

    Apple is enormously undervalued here. The estimates will continue to come up as consensus still has some oddball laggers who didn't bother to update their $4 and change estimates thus dragging down the true EPS as well as the growth rates for 2011 and beyond.

    Investors who realize all this are the ones who "know" an industry and company. These are the ones who will profit from holding or accumulating here.

    Also the 45/share on the books backed out of the share price bumps my price estimates up another $45 from what I wrote above. Even if you take that out you still have a compelling argument for 50% upside within a year or so. two or three years out you could see the double. At today's price there is little reason to sell because if it holds today's price by the end of the year almost 1/3 of the company value will be in cash with zero debt.

  • Report this Comment On March 04, 2010, at 5:10 PM, EquityBull wrote:

    Todd,

    You cannot look at a company and value its market cap based on other companies market caps. You have to value it based on free cash flow and balance sheet.

    Apple is trading at historically low PE (lower then before Jobs took the helm again) yet is growing in the recent quarter by 30% top line and much more on the bottom line. Typical valuation methods would value Apple with no less then a 25 PE and I believe the market will adjust the multiple for this juggernaut closer to its historical as well as current growth rate which would be 30 or more optimistically even 35. This yields a price on $12/share for 2010 of $300 at minimum. Optimistically apple may exceed the $12/share by a dollar or two and if it does and if it affords a cheery 35 market multiple you get $490/share.

    That said the low target based on typical Fool valutaion methods and DCF models gets you at least $300/share.

    Buffett believes you don't need to water down your portfolio if you understand an investment. Big returns come from concentration in some great names and apple has few hurdles ahead.

    Potential patent lawsuits may shut down Android and any smartphone competitor who is stealing their tech. They have macs, iTunes ecosystem, ipods, iPad's, iPhone, app store. There are few companies you can compare to apple right now. It is one of the leading brands and most respected companies in the world now and for good reason.

    They have a CEO with great vision and ties into media companies as well as other high power places.

    Apple is enormously undervalued here. The estimates will continue to come up as consensus still has some oddball laggers who didn't bother to update their $4 and change estimates thus dragging down the true EPS as well as the growth rates for 2011 and beyond.

    Investors who realize all this are the ones who "know" an industry and company. These are the ones who will profit from holding or accumulating here.

    Also the 45/share on the books backed out of the share price bumps my price estimates up another $45 from what I wrote above. Even if you take that out you still have a compelling argument for 50% upside within a year or so. two or three years out you could see the double. At today's price there is little reason to sell because if it holds today's price by the end of the year almost 1/3 of the company value will be in cash with zero debt.

  • Report this Comment On March 04, 2010, at 5:18 PM, foolhardy7 wrote:

    Re: point made by qcw and author's response:

    Understood as to J&J, but what about Apple? It stays as a strong recommendation on one of the premium services, and recently (perhaps currently) was a "buy now" recommendation.

    I too find it frustrating that there is not more guidance about selling in the premium services. If one invests a reasonable amount (say 100 shares) in various recommendations, it doesn't take too long to run out of money. (Maybe months, maybe years, depending on your assets, but certainly short compared to retirement.) Over the course of five years, sell recommendations are rare, and as I recall have come after the stock has been badly damaged and all the "we hope management will ..." comments are no longer valid. I would like to see more discipline exercised of the kind you are promoting in the Fool's premium recommendations.

  • Report this Comment On March 04, 2010, at 6:23 PM, NotJesseL wrote:

    But why do they need all this cash? Doesn't this make them an acquisition target and doesn't this reduce the ROI? I think they should deploy this cash or send some of it back as a dividend.

    Also, Apple sells premium priced products. If they have quality issues somewhere down the line, the magic "i" will lose its value, and they will lose their best moat. This company is a little different and even though I have been in the IT business for over 30 years, I think its hard to really understand the company w/o spending a lot of time on it. So, it breaks a rule of "Don't buy something you can't understand" for most people.

    Let me put it a different way. I have no clue why my kids want an iPod vs a generic MP3 player, and I suspect its mostly a fad thing.

  • Report this Comment On March 04, 2010, at 6:41 PM, wordjunkie wrote:

    Yes, Apple has come far in the last year but only after tumbling from about 200 after the Steve Jobs death scare. In other words, the stock is sitting right now about where it was two years ago. But look at all they've done in that two years, and look at all they've got going forward. The iPad could be a revolution, and the App Store rocks the world. I'm sitting tight.

  • Report this Comment On March 04, 2010, at 8:02 PM, Signmaker9 wrote:

    I'm confused. David recommends buying apple & Todd Wenning recommends selling apple. What's the story?

  • Report this Comment On March 04, 2010, at 10:35 PM, hemhog wrote:

    "Let me put it a different way. I have no clue why my kids want an iPod vs a generic MP3 player, and I suspect its mostly a fad thing." --NotJesseL

    Dear Not: Here's a clue. These things simply work in such a way as to provide exceptional levels of delight.

    They're like friends who always help you. They have an amazing ecosystem and ease of use unmatched anywhere.

    When Steve Jobs says a product is revolutionary, he's not talking about the technology. He's talking about how people will use it and interact with it. That's the revolutionary part.

    Apple's products, all of them, are, simply put, revolutionary in the way they interact with people, while not at all revolutionary in new tech capabilities. That's why techies don't get it. They're looking at the technology when it's the human-machine interaction that makes them wonderful.

    The tech is just good enough to make the interaction work, that's all.

  • Report this Comment On March 04, 2010, at 10:36 PM, dikrew wrote:

    Some of the readers of MF articles, it seems to me, need to practice reading comprehension. Or, maybe I do!. Todd reported the fact that BRK reduced its position in JNJ. Whether Buffett made that decision and whether BRK did it "to allow ... room for other opportunities" strikes me as Todd's speculation. In any case, Todd did not recommend selling JNJ, as so many commenters have interpreted.

    WRT APPL, Todd said maybe you should sell some (italicized) of your APPL. He didn't say sell all of your position. I interpreted his advice as meaning, if APPL has become a larger position in your portfolio than planned, review your plan. If the larger position makes you uncomfortable, trim your shares: if you like your position, revise your plan.

  • Report this Comment On March 05, 2010, at 12:25 AM, qcw wrote:

    To Dikrew,

    You say Todd did not recommend selling the stock. How do you interpret the article title of

    "ONE QUALITY STOCK TO SELL TODAY"

    Its only 6 words I think my reading comprehension is ok there. <gg>

    To Others:

    When I bought gold at $230/oz there were many times I could have sold just because <insert reason>.

    Sometimes you have to let winners ride.

    All of this said it was a good read, its just that sometimes these articles lead one to believe that the Fool is a collection of writers no more focused on a consensus than the various guest dragged out on CNBC.

    -Q

  • Report this Comment On March 05, 2010, at 9:06 AM, EquityBull wrote:

    I believe you let your winners run if the prospects are still good and you cannot find a better place to put that money. If it was your ONLY holding and a sizeable amount of your net worth or retirement I would agree with Todd to take some off the table. that would be prudent.

    However if your portfolio is somewhat balanced and your timeframe is measured in several years minimum you would be fine IMHO to let Apple run based on valuation, brand, moat, market opportunity and earnings run rate. Apple for the moment is the one everybody is trying to beat.

    BTW...why short term movements generally don't mean much it always seems the way where a sell article comes right at the cusp of an upward move. Apple is north of 215.26 which puts it at an all time high (up around $5/share pre-market)

  • Report this Comment On March 05, 2010, at 9:07 AM, EquityBull wrote:

    I believe you let your winners run if the prospects are still good and you cannot find a better place to put that money. If it was your ONLY holding and a sizeable amount of your net worth or retirement I would agree with Todd to take some off the table. that would be prudent.

    However if your portfolio is somewhat balanced and your timeframe is measured in several years minimum you would be fine IMHO to let Apple run based on valuation, brand, moat, market opportunity and earnings run rate. Apple for the moment is the one everybody is trying to beat.

    BTW...why short term movements generally don't mean much it always seems the way where a sell article comes right at the cusp of an upward move. Apple is north of 215.26 which puts it at an all time high (up around $5/share pre-market)

  • Report this Comment On March 05, 2010, at 9:16 AM, futuretrade wrote:

    @NotJesseL

    "I have no clue why my kids want an iPod vs a generic MP3 player, and I suspect its mostly a fad thing"

    Your children like the iPod instead of the MP3 player because of the experience that the iPod interface and software give you. When you use an iPod you are browsing music in a very easy, intuitive way.

    Using an MP3 player is a different experience, more to do with interacting with a device than browsing music.

    The genius of the iPod is that it makes the hardware invisible. The MP3 players don't do that.

  • Report this Comment On March 05, 2010, at 10:09 AM, maplewoodman wrote:

    @NotJesseL

    I agree with futuretrade, the iPod (like ALL of Apple's hardware ) is so much easier to use than its cometitors'.

    When I set up my first wi-fi network, it took over 4 hours, and when I added a PC laptop, another 40 minutes. But when I added my iMac to that same network, apart from providing the WEP, the Mac OS took care of it completely and in less than 2 minutes, I was looking up the closing price for AAPL.

    Interfaces on PC's seem to grow out of the app, with "how do we teach people to use this?" being the last question. With Apple, the FIRST question seems to be "how can we get this app to work with the least user input?"

    The design, ergonomics, interface, speed, and especially support, are all superior - that's why Apple products cost more and why people are willing to pay more.

    Disclosure: no AAPL shares - I lost them to covered calls I wrote @ $85. :-(

  • Report this Comment On March 05, 2010, at 5:16 PM, patos72 wrote:

    Thank goodness I didn't sell on the opening. Apple up nearly 4%. You are becoming more comercial and confusing every day.

  • Report this Comment On March 06, 2010, at 11:10 AM, mikecart1 wrote:

    AAPL will drop to $200 again in the future. Trust me.

  • Report this Comment On March 09, 2010, at 7:30 PM, tom2727 wrote:

    I think all he's saying is you should consider re-balancing and taking gains after a rally. If you like AAPL or JNJ, fine keep them. But if the recent rally grew them to be >10% of your portfolio, that fact alone is a reason to sell down to 5% or so, even if you like them going forward.

    No matter how much you like a stock, no matter how much research you've done, there's always the random element that can bring it down. No one can predict the future. Best to diversify with 20 good ideas than risk all you have on 1 "really really good" idea.

    Try this exercise if you don't believe me. Look at all the stocks you own now and try to guess which will be up the most a year from now. Come back a year from now and I bet you will have guessed wrong.

    And what's all this garbage with expecting TMF to be your personal stock broker? It's a forum for discussing ideas. Two authors are allowed to have different opinions about the same stock. If you want someone to do all the work for you, go buy a mutual fund.

  • Report this Comment On March 09, 2010, at 7:32 PM, tom2727 wrote:

    I think all he's saying is you should consider re-balancing and taking gains after a rally. If you like AAPL or JNJ, fine keep them. But if the recent rally grew them to be >10% of your portfolio, that fact alone is a reason to sell down to 5% or so, even if you like them going forward.

    No matter how much you like a stock, no matter how much research you've done, there's always the random element that can bring it down. No one can predict the future. Best to diversify with 20 good ideas than risk all you have on 1 "really really good" idea.

    Try this exercise if you don't believe me. Look at all the stocks you own now and try to guess which will be up the most a year from now. Come back a year from now and I bet you will have guessed wrong.

    And what's all this garbage with expecting TMF to be your personal stock broker? It's a forum for discussing ideas. Two authors are allowed to have different opinions about the same stock. If you want someone to do all the work for you, go buy a mutual fund.

  • Report this Comment On March 12, 2010, at 1:26 PM, OlNewbie wrote:

    If you have held some of these stocks for a while, watched them grow and have collected, reinvested dividends on the div stocks, why not set up an alert to sell them if they go down 7 or 8 percent vs. jsut selling them, giving up any future growth, dividends, compounding benefits...? If you're in it for dividends, then price fluctuation might actually be advantegeous due to picking up more shares when share prices are lower while maintaining a steady dividend stream.

  • Report this Comment On March 12, 2010, at 4:21 PM, zoeyves wrote:

    Who cares if a stock moves up or down 4%? I bought Apple when they where around 20$ before the split; sold them for 143$ last year. Yes, that means a ~15 bagger (~1400 %).

    Now that Apple sits around 200, am I sad I sold? No. I bought FLS from the proceeds and sold them yesterday at a 90% gain.

    That's the spirit of the article. Put your money to better use elsewhere if you can.

    BTW, this has nothing to do with Apple per se. Great company. Just not the potential it had when it was at 15$.

    And no, not all my investments are as successful as Apple or FLS. If so, I would not be sitting here posting comments, I'd be sailing in the Caribbean ;-)

  • Report this Comment On March 12, 2010, at 5:16 PM, uconnhusky2 wrote:

    Strange that the article dated 3/4 hit my e mail on 3/12. The iPad is already a huge success and the stock has done nothing but go higher since the date the article was written. As someone wrote, you can't judge a company by market cap. Earnings grow every qtr, aggressive analyst estimates are exceeded every qtr, The new accounting method shows AAPL to be cheap even at these prices. Most current targets are 250-300 and based on forward P/E the fair value of the stock is 335. Yes 335. Sell on March 4th? I pity the fool.

    AAPL will drop again, but unless you are day trading it, I think you will be rewarded for holding it long as all of have been in spite of ups and downs over the last few years.

  • Report this Comment On March 13, 2010, at 6:05 PM, stockju wrote:

    We are not sure why COP is in the sell list. From a technical analysis standpoint, COP is making higher lows and hitting resistance $52. We consider it to be a good technical formation.

    We prefer Energy sector for 2010. It is ranked 3 in our analysis. http://www.stockjupiter.com/Step3/Top%20Sectors%20Stocks.htm...

    We are bullish on this sector based on oil price increase forecasted for 2010, predominantly due to supply constraints as a result of low capital spending in 2008-2009. This sector also shows a sharp increase in number of stocks upgraded since May 2009. Energy sector also ranks in top 5 in the 52 week high stock price category and ranks highest in net institutional buy activity.

    We will recommend COP to be part of your portfolio in 2010.Wait for it to reach $68 before you take profits.

    Demand for energy will also pick up as housing and job market improves in 2010.

    btw, we concur with selling AAPL, although, it still has potential to rise.. we recommend taking profit from this stock.

    sincerely,

    www.stockjupiter.com team.

  • Report this Comment On March 13, 2010, at 6:09 PM, stockju wrote:

    ..

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