There Comes A Time To Sell

FEW investments go up forever, so as tempting as it may be to stick with a big winner, fund managers sometimes conclude that enough is enough.

After a five-year bull market, there are plenty of winners to choose from and several potential catalysts for selling: concerns about earnings as a result of slower economic growth or company-specific factors; extreme valuations; better opportunities elsewhere or a desire to lock in a profit and limit risk.

High valuation, relative to prospective earnings growth, recently compelled Jim Huguet, president of the Great Companies asset management firm, to close out his position in the investment bank Goldman Sachs and sell a piece of his stake in Coach, the maker of luxury goods. Goldman has fallen a bit since he sold it in the mid-$220s, and Coach has dropped sharply.

“We’re not selling because we don’t like them,” he said, emphasizing that he finds both companies to be well run and have strong brands. Instead he decided that the stocks were “getting pretty pricey and that it was time to take something off the table.”

That sums up why John Buckingham, chief investment officer of Al Frank Asset Management, sold some of his shares of Apple last month for about $170 apiece. He bought the stock at about $7, giving his investors a huge gain and a lopsided portfolio weighting in the technology darling.

“When you’ve got a gigantic profit, it makes sense to peel some off along the way,” he said.

Trimming his holding also conformed to his sensibilities as a value manager. He still owns the stock and expects it to hit $200 at some point, but he noted that it trades at roughly 40 times earnings, “and that ain’t exactly value.”

Mr. Buckingham also sold some of his shares in Deckers Outdoor, the footwear maker, and DryShips, an operator of cargo vessels, companies that “have gone crazy on the upside.”

That description might also be apt for Chinese stocks. Hugh Young, head of equities for Aberdeen Asset Management and another value manager, has been selling into the steeply rising market after having invested in it long before it was fashionable.

“We have been steadily taking profits from China, especially China Mobile and PetroChina,” he said.

Mr. Young is proud of the fact that he invested in the oil company before Warren E. Buffett did more than four years ago. Aberdeen picked up shares for roughly one Hong Kong dollar; today they trade for about 20. (One Hong Kong dollar is worth about 12.8 cents)

A less satisfied Tim Guinness, co-manager of the Guinness Atkinson Global Energy fund, called his disposal of the China National Offshore Oil Corporation “my most recent less brilliant sale.” It was up about 25 percent in 2007 when he sold it, then it rose a further 75 percent. His regrets are tempered by the stock’s high valuation, around 23 times earnings.

Two more rewarding sales have involved Tesoro and Sunoco, independent refiners whose shares were bid up amid high spreads between prices of crude oil and the products refined from it. Since he sold in July, the stocks have been flat to lower, he said.

THE opposite happened to Ken Lee, a fund manager at Rice Hall James & Associates, after he sold his stake in Dynamic Materials, a specialist in a process known as explosive welding for the energy industry (its ticker symbol is BOOM). He bought the stock in the high $20s and sold it in the mid-$40s, believing it had become too expensive. It then passed $50. While he does not regret his decision, he realizes that it was premature.

Mr. Buckingham confessed to a small case of seller’s remorse over selling Apple and seeing it rise. Shedding a stock too early is an occupational hazard, he acknowledged, but the alternative can be even more damaging.

“A mistake investors make is to hold on to winners for far too long,” he said. “The overall weight of the winners in your portfolio can put you in grave jeopardy of loss once the tide turns.”

Tag Cloud

External Information

Additional Information

Where Am I?