- Major changes in fundamentals such as EPS or D/E ratio
- Lack of Dividend or Revenue Momentum
- Diversification adjustment due to sector overweight or individual stock overweight
- Excess valuation
I rarely sell and I am not a market timer, however, the time has come to trim some positions. Like herbs, trimming can provide the stimulus for future growth.
The market does not go straight up and at some point, I think I will have an opportunity to buy some good stocks at reduced prices. I am not predicting an immediate correction and I am not selling everything I am trimming.
I have two ways to trim. One is to sell outright and the other is to sell call options that are very close to the current trading price suggesting it is highly likely that my stock is assigned when the call is exercised.
Listed below are the positions I trimmed that are in the target portfolios I have published and that I follow. It is important to note that these trades were done in my account. I do not make any trades in the target portfolios. They are long only for the purpose of tracking. Each one of the trades listed below uses the basis in the target portfolio which also is within $.50 of my personal basis.
Which Stocks to Trim?
When the market is at a high which was quickly achieved rather than slowly attained, as we have now, I often look over my stocks and decide to get rid of some positions. I try not to look back at lost gains should these stocks go up. Lost gains can drive you crazy so if I have a stock that is a dividend aristocrat but has gained so much that I want to lock in profit, I often times sell only part of my position. If the market tanks, I can add back or use dividend reinvesting. If my stock continues to go up, I still have some left but I use the proceeds to buy another position. Remember there is always another stock to buy when you are an income investor.
Changes in Fundamentals:
Pepsico, symbol PEP, is an excellent example of a change in fundamentals. Because PEP never had a high enough yield to be a Dividend Machine for my target portfolios, it does not appear in the table below. But I have owned it and I sold it because their debt has skyrocketed. Readers of this blog know, I don't like high debt to equity ratios period! I sold PEP at $109.861 today. My basis was $66.
PEP Chart from Nasdaq.com
Examples of changes in fundamentals that are in the first table include: Caterpillar, symbol CAT. Caterpillar's earnings have been under pressure as their revenues tanked due to global influences. Other countries have all the big equipment they need for a while. When earnings are less than dividend paid out, I look to sell out.
However, I put my sell in a just above the bid price rather than a market order and before the news of the investigation that sent CAT shares down about $5.00 today. I did not want to chase the price down and I found a May call for $2.20. I took the call and will suffer with this holding until the call expires. My personal basis is $78. The Dividend Machine portfolio basis is $82.50.
CAT Chart from Nasdaq.com
Chevron, symbol CVX, is in a similar boat as Caterpillar. Their earnings are less then dividend paid out. In Chevron's case it is due to the price of oil. This stock is in the first 5 Dividend Machine portfolios and I have a similar cost basis. I sold only those shares on which I have a gain. I am reinvesting dividends on the other shares as I wait for some turn around in CVX's earnings.
CVX Chart from Nasdaq.com
Lack of Dividend or Revenue Momentum:
AT&T, symbol T, is an excellent example of a stock with a good price gain but a lack of dividend growth. Their most recent dividend increase from $.48 to $.49 is disappointing. You can make the argument that their robust yield makes up for it, but here was a chance to take some profit off the table and employ it for more growth. I took advantage of that gain today.
T Chart from Nasdaq.com
Cisco, symbol CSCO, on the other hand had a good recent dividend increase but I have waited for revenues to improve. CSCO's most recent four quarters of revenue were $ 48,570 (m) versus $47,873 (m) three years ago. This is anemic. I kept half of my position but I am looking to raise some cash and this stock stood out.
CSCO Chart from Nasdaq.com
Genuine Parts, symbol GPC, is another stock I have owned a long time and have enjoyed robust capital gains and dividend growth. However, during the past three years revenue has stagnated $15,339 (m) from $15,341(m). With that in mind and a meager 2.6% dividend growth, I sold half of my position today.
Johnson & Johnson is such a good stock but their stock price is pretty high. I have owned this stock a long time and periodically taken profit. It is hard to recommend trimming my position, however, I personally own an awful lot of big pharma. I am probably going to use half of the proceeds to move into Pfizer, symbol PFE, which has a higher yield. A post I did recently comparing big pharma stocks makes me want to the buy the revenue stream PFE offers. I will still hold half of my JNJ position.
JNJ Chart from Nasdaq.com
I sold a large portion of TC Pipelines an MLP, symbol TCP, My reason is similar to JNJ. TCP is a high yielder, but I just own too much in the energy space and particularly in the MLP space.
Part of the diversification puzzle is not just sector diversification, it is also to make sure you do not have too much money in any one stock. Leggett and Platt, symbol LEG is an example. I have benefited greatly from the stock price increase and the dividend increases (up 4.4% over the past 3 years.) However, I just own too much so I sold part of my LEG.
Sysco, symbol SYY, is a similar stock for me as LEG. I just simply own too much of this very good Dividend Machine and am trimming my position.
Valuation is a tough metric. The most simple measure for the ordinary investor is P/E ratio (price earnings.) I have no argument with investors who use a different metric. I considered lightening up on Microsoft, symbol MSFT, because with a P/E ratio of 30, MSFT is richly valued. Since, earnings are expected to grow as MSFT capitalizes on their "cloud" work, I am willing to stick with MSFT. However, if I can unload some by using a call, I am also willing to do that. Today I sold an April $65 call for a premium of $1.06. If they take it, I like the gain. If they do not, I get to keep it.
Paychex, symbol PAYX, was a good Dividend Machine pick. I added it when I was working on the 2016 portfolio (now closed.) I do not have a big enough position to make a difference and with a P/E ratio of 29, this stock was a good target for me to sell to raise cash. Although I sold a call on my position in the past, I could not find a call and therefore, sold all my shares in PAYX.
I must reinforce that market timing is fool's folly, but taking profit is never a bad idea. In this post you can see I took nearly a 50% gain on stocks while improving my portfolio. Never a bad idea.