Finding Stocks That Should Be Sold

Suggesting a stock should be sold is not meant as an insult to the company. But it is often a touchy emotional subject and one often guided more by competing folklore (i.e., ride your winners and sell losers versus take winnings off the table and average down on losing positions) than substance. Let’s change that. I’ve prepared a list of sell recommendations based on the same method I use to identify ideas for buying, data, screening rules, and ranking factors.

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What it Means to Say “Sell”

This depends on your goals.

In its most basic sense, it means eliminating a stock from your portfolio because you expect it to drop in price. Or, you might eliminate a stock from your portfolio because you expect it to underperform; i.e. it may still go up, but there are others you believe likely to appreciate more. Also, and perhaps most significantly for many larger and institutional investors, it means continuing to hold but “underweighting” the position (i.e. if the stock’s target percentage within the portfolio is, say, 2%, it might be reduced to 1 or 1.5%).

Whatever the reason, it’s important to recognize that a Sell recommendation absolutely positively does not imply a negative view of the company. One must always separate an opinion of the company from an opinion of the stock. Sometimes the two go hand in hand. Often they don’t. Great companies can have unattractive stocks and vice versa. In fact, many of the stocks got onto this screen largely because the companies are good and well respected. The only reasons they make this list is because of some dysfunctional Wall Street approaches to investing in successful companies.

Why Run a Screen Like This Now?

Certain times seem better for active sell hunting than others, and I think the present is such a time.

I’m too chicken to predict a bear market. The natural tendency is for stocks to go up over the long term, based on the interplay of rising population, rising education, productivity and living standards all of which translate to better economic activity and corporate profits and all that is good on the whole for ownership of productive assets – which is what stocks are. But we all know these things go in fits and starts rather than in a straight line the result being that some periods are less favorable for stock ownership. Looking ahead from where we are now, I can’t help but focus on the end of the approximate 35-year plunge in interest rates which had the effect of pushing stocks higher regardless of the impact of other important factors such as profit growth and risk.

We may still see stocks rise from here, but for that to happen, we’ll need much larger contributions from profit growth and/or diminished risk than we’ve needed at any time since the 1970s. Maybe we’ll get that. Maybe we won’t. I’m not sure of the latter. But I sure as heck don’t want to bet the farm on the former.

The possibility of better news in terms of growth and risk makes me reluctant to say “Sell everything.” But my concerns there, as well as my convictions regarding interest rates, suggest that at the very least, we ought to be going portfolio to portfolio rounding up potential troublemakers; i.e. stocks likely to be more vulnerable than many to down markets. It would be a lot easier to maintain equity portfolios, as many gurus suggest we always should, if we can at least eliminate or trim issues that seem more vulnerable than most.

Choosing Sell Criteria

This is hard, not because of any emotional attachment to stocks but because the number of potential sell triggers is vast.

For me, when I use pure screening to select stocks, it can be a failure, when the model is refreshed, to meet all of the original Buy criteria. The advantage of this is logical purity: If the stock isn’t good enough to be purchased right now, there’s no reason to not get rid of it. The downside is turnover. Data changes continually so this can lead to a lot of trading, sometimes for seemingly trivial reasons (i.e. If my screen requires a P/E below 20 and a growth rate above 15%, I’d have to sell if the growth rate was 22% but the P/E had risen to 20.3, and repurchase shortly thereafter if the P/E drops to 19.98.) Personally, I can live with this because I trade at Folioinvesting.com and, hence, need not worry about per-trade commissions.

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Disclosure: None.

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