We Sold Your Stock

You know how to buy stocks. Do you know how to sell them? I ask this because it's only natural to have some form of emotional bond with your holdings. How can you not? Your particular collection of stocks is your recipe. It's your garden. It's your alma mater.

Looking back, you'll find that there were probably plenty of sound reasons why you chose one up-and-coming growth stock over another. Did that decision process instill in you a sense of loyalty? Did your loyalty cause you to ignore the sound reasons to sell along the way?

The market has been particularly brutal over the past two months. Odds are that if you were able to make the necessary disconnect and cash out of some uncomfortable positions, your portfolio is in better shape.

Today, I am going to explore the four stock picks that the Motley Fool Rule Breakers newsletter service bailed on over the past year. If you happen to still own one of them, you may not be happy with the decision, but I'll walk you through the breakup process, and maybe you'll be able to both appreciate our decisions and also apply such decisions successfully in vetting your own holdings.

Breaking up is hard to do
Clicking that "sell" button doesn't have to be a Kleenex moment. Take a step back. Ask yourself whether you would buy the shares you hold given any recent developments and the implications on the company's fundamentals and the stock's valuation. If you wouldn't be a buyer, explore the possibility that you would be a seller instead.

That's the conclusion that the Rule Breakers team I belong to reached when it decided to let go of Great Wolf Resorts (NASDAQ:WOLF), Bankrate (NASDAQ:RATE), Overstock.com (NASDAQ:OSTK), and BioSante (AMEX:BPA).

I know. Most investors subscribe to a growth stock newsletter for stock picks. And we've still got plenty. However, it's also important to warm up that crow and chow down from time to time. Our readers deserve as much. The scorecard does, too.

Getting in early is often the key to superior investing. Let's hear it for getting out early, too. And by "getting out early," I don't mean having an itchy trigger finger at the first sign of imperfection. You'll have a recipe for disaster if you're down to the frenetic twitches of a speculator -- that kind of behavior will only enrich your commission-snagging broker. The key is to realize when events are substantial enough to merit a thorough review.

Let's start with Great Wolf Resorts. It was the newsletter's first sell recommendation last summer. The leader in the booming market of building high-end resorts with massive indoor water parks went public in December of 2004, and it had all the signs of a promising growth stock. Expansion was heady. Profit projections were mounting. I singled it out to my fellow subscribers as worthy a few months later.

The problem was that the company wound up stumbling -- twice -- in its first few months as a public company. As the hotelier ramped up for its telltale summer season, its first as a public company, it warned of weakness and somehow managed to perform even worse than it had forecast.

That was too much to take. The company clearly was in no position to go public if it didn't have the mettle to deliver the goods early in its traded tenure. When you squander that kind of faith, it can take a great deal of time before the market comes around.

Landing the perfect goodbye kiss
Overstock.com was another company that wore out its welcome. David Gardner was one of the earliest fans of this company. Last year, we even met with CEO Patrick Byrne, who is one of the more colorful and charismatic corporate chieftains that you will ever come across.

He's a passionate leader, and he has steered his e-tail venture to its top line incredibly well. Our faith was rattled for other reasons. The company's lack of profitability was a logical concern, even though we can forgive that if a company is forsaking near-term income in the pursuit of rationally aggressive growth. That kind of approach paid off well when David bought in to Amazon.com (NASDAQ:AMZN) under those same assumptions in the original Rule Breakers portfolio in the 1990s. It wasn't the same this time, though. Byrne seemed a bit too distracted in his vendetta against naked shorts and not focused on running his own company.

"I was actually planning on leaving this January for a much more interesting job," Byrne was quoted in a Reuters article earlier this year. "But now it looks like we are stuck with each other."

It may seem subtle, but the comment was a disservice to shareholders. Byrne's conspiracy theories may very well be spot-on, but as long as the income statements are sending mixed messages, it's better to concentrate on the job at hand.

BioSante was a biotech that Charly Travers had singled out. Charly's record in this field is amazing. Two monthly issues later, he went on to recommend Vertex Pharmaceuticals (NASDAQ:VRTX), a stock that has gone on to nearly triple in that time. BioSante, on the other hand, didn't just stumble. A disturbing cash-burn rate and a critical clinical-trial delay rattled Charly's faith in the tiny hormone-drug developer. It was booted, and it continued to tumble.

Getting out on top
Bowing out of a bad call isn't the only reason to move on. Back in November, David recommended financial rates publisher Bankrate at $29.74. Thanks to the popularity of Internet users flocking to the site to get the latest rates on everything from mortgage refinancing to soaring money-market and CD yields, Bankrate became an all-weather winner.

Five months later, the market came around to embracing the story. With the stock bid up to $46.96, David issued a sell recommendation. A secondary offering threatened to dilute shareholders, and the company's valuation appeared pricey. It was the right call. The shares have surrendered more than a quarter of their value over the past two months.

There is a lesson here: If you're like me, you have probably learned far more from the stocks that didn't pan out for you than the ones that coasted along to great gains. Your portfolio can truly be enriching both ways. The key is to set aside your emotions and analyze why you missed with the duds. It will help you avoid them in the future.

So go ahead and scrutinize what you buy the way a dieter scans nutritional tables. Tomorrow, a new issue of the Motley Fool Rule Breakers newsletter goes out, and you know we'll be tracking the new picks diligently. It's what you -- and our market-thumping scorecard -- deserve.

Check out the winners and losers that make up the interactive newsletter service for 30 days with a free trial subscription that will keep you updated on our recommendations -- including tomorrow's new selections. Amazon is a Stock Advisor pick, and Vertex is still a big winner for Rule Breakers subscribers.

Longtime Fool contributor Rick Munarriz has been writing the "Early Adopter Roundup" column since the newsletter's inception in the fall of 2004. He does own shares in Great Wolf Resorts. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.