Late last year, I made one market-thrashing stock prediction.
Normally, I'd be quite pleased, but I made five stock predictions.
The article in question was "5 Stocks to Sell for 2011."
In it, I wrote the following: "I've identified five stocks that are excellent sell candidates, two of which are in my personal portfolio."
The volatile results over the past year have surprised me and hopefully will make me (and you!) a better investor. I've also updated my outlook on each of the five stocks, but I'm getting ahead of myself.
Before we look at where the stocks are now, let's see where they were halfway through the year. It was ugly!
Return as of June 30
Whole Foods Market
Source: Yahoo! Finance. Returns based on starting date of Dec. 23, 2010.
Remember, I said to sell these stocks. Collectively, they were up just over 50% in a nearly flat market. I was losing to the market by 45 percentage points!
I was losing by so much that I was almost looking forward to writing this article as a tale of epic failure. But as I look at the sell picks now, a full year after I made them, the story looks different. Somewhere in the darkness, the gambler, he broke even:
Return as of Dec. 22
|Whole Foods Market||35%|
Source: Yahoo! Finance.
This is a pretty interesting snapshot of the stomach-churning nature of the stock market. Notice that the market was basically flat from the six-month mark to the one-year mark. Yet, the individual stocks had wild rides, led by Netflix's 102-point and Vonage's 79-point swings. My list went from an utter disaster to a "meh" prediction.
Before I give my thoughts on the stocks themselves, let me share what's struck me. The obvious point is that the stock market is volatile -- and individual stocks are amazingly so. Netflix's meteoric rise and fall from grace is the stuff of screenplays. In three months, it went from over $300 a share to less than $100. Sure, it made some missteps with Qwikster and the like, but Netflix faced similar opportunities and threats the whole time.
Digging deeper, we have to think very hard as investors when we sell our winners. In my article last year, I highlighted Whole Foods and Tempur-Pedic as stocks I personally own. I wrote, "At today's prices, I prefer the stocks of Whole Foods and Tempur-Pedic to those of Wynn, Netflix, and Vonage but come January I will be seriously considering selling at least part of my positions in each."
When the New Year came, I stayed true to my promise. I decided to sell part of my Whole Foods position (I had already sold part of the Tempur-Pedic position). For me, it was a compromise on the classic growth stock problem -- the choice between (1) selling a stock that looks fairly-to-richly-valued and possibly missing out on growth-fueled gains, or (2) holding onto a stock that could come crashing down when growth moderates or the business suffers setbacks.
That sell-a-portion compromise works well for my emotional make-up when dealing with a growth stock winner in my portfolio. But I still struggle with whether it's the best course of action. This strategy has hurt me so far on Whole Foods and Tempur-Pedic, but if I had been a Netflix investor, it could have saved me a ton.
It comes down to this. The better the business prospects of the company, the harder we should think about selling because of valuation. So I will continue to hold my remaining Whole Foods and Tempur-Pedic shares going into 2012.
Wynn -- which is my favorite casino company because of the management of founder Steve Wynn -- now has the cash flows and extra year of operational evidence to discourage a sell call from me. In fact, it may warrant a second look as a buy candidate. Even though Wynn has been flat over the last year, I regret making it a sell candidate for 2011 because I do admire the business, risky as it is.
Meanwhile, I'm not a big fan of the business prospects or Netflix or Vonage. Of course, Netflix is now offering bulls a cheaper valuation and bears less reason to hate. As for Vonage, I do have to give it some credit for finally becoming profitable on both an earnings and free cash flow basis over the last 12 months.
I won't be going out to buy shares of Netflix or Vonage anytime soon, but I have no strong follow-up predictions for 2012 on any of these five. I'll leave the bold prediction to our chief investment officer. He identified one company as the No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this legendary company.