Were you thinking of doing some selling? Now’s a good time to put your plans into action. It’s not that I’m predicting a stock market crash, or anything like that. But selling is a critical discipline within the investment process.
The truth is that no asset keeps going up forever without significant interruptions. Periodically, you should comb through your portfolio, seeking investments that have exhausted their near-term (or even long-term) prospects.
If the ratio of potential downside to upside is big enough, and you won’t incur an unacceptable tax bill, you should sell.
Why go through this culling exercise now? Four simple reasons:
- the headline U.S. stock market indexes are hovering near all-time highs
- valuations are stretched
- upside momentum is waning, in a long-term sense
- bullish sentiment is getting extremely frothy
On the fourth reason above, the Investors Intelligence survey of newsletter writers brought an unwelcome revelation this week. Bulls now outnumber bears by a whopping 42.5%, a margin above the 41.5% we saw at the end of December and just below the 42.7% that prevailed in mid-November (the two most recent market tops of any trading significance).
Before you jump to conclusions and decamp for the hills, let me remind you that readings above the 40% “red line” on the Investors Intelligence poll don’t always herald a major peak. Indeed, as the chart indicates, the spread rose even higher than today’s levels three times in 2014. The worst consequence was a 7.4% decline in the S&P 500 from Sept. 18 to Oct. 15.
In short, there’s no need to panic over these yellow flags. Rather, I suggest that you simply use the market’s current strength as an opportunity to trim your most vulnerable holdings.
I recommend selling Knowles Corp (NYSE:KN) and Rayonier Advanced Materials Inc (NYSE:RYAM), two spinoffs we received from larger companies. Both KN and RYAM are struggling with poor operating performance in highly competitive industries.
While it’s possible their depressed share prices will attract a takeover bid, that’s pure speculation and not a good bet at this late stage of the market cycle. Sell. If you own the shares in a taxable account, the loss may come in handy to offset gains you book this year.
Over the past few sessions, preferred-stock investors have caught a whiff of the selling pressure that will undoubtedly blow in if Treasury-bond yields continue to escalate. You could also sell PowerShares Financial Preferred Portfolio ETF (NYSEARCA:PGF).
Swap the proceeds to iShares Intermediate Credit Bond Fund (NYSEARCA:CIU). Although CIU yields less than PGF (2.4%), the fund’s average duration of just 4.2 years will help protect your principal as interest rates rise.
Finally, sell iShares U.S. Preferred Stock Index Fund (NYSEARCA:PFF). The same reasoning applies here as with PGF.
On the buy side, among select few names worth considering, Procter & Gamble Co (NYSE:PG) says it now expects to divest 100 brands, decreasing Procter & Gamble’s annual sales by 14%, or about $11 billion. Traders took PG stock down last week because of the uncertainty the news creates: Can PG replace those lost sales with something more profitable?
I’m confident Procter & Gamble CEO A.G. Lafley will find a way to do it. (After all, these are low-margin businesses PG is getting rid of.) Buy PG on the dip. Procter & Gamble stock’s current yield is 3%. I project a total return — dividends plus price gain — of 12% – 15% in a year from PG.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.
