Stocks have had a fantastic run since February and up until a few days ago were flirting with new all-time highs. But if you recall, January was a nasty month … one of those months that makes you wonder why you bother investing in the stock market at all. Virtually everything — even the highest quality retirement stocks — took a thorough pounding.
The best time to make portfolio changes is when the market is high and you’re not blinded by fear. It’s easier to objectively choose retirement stocks to sell when your portfolio is sitting near highs.
You’re able to look at your retirement portfolio a lot more objectively, and you’re a lot less likely to impulsively sell stocks out of fear.
So today, we’re going to do a little portfolio house cleaning. I’m going to recommend seven stocks you should dump from your retirement portfolio. Not all of these stocks are “bad,” per se. But none are a good fit for your retirement portfolio and should be dumped at your earliest convenience.
Retirement Stocks to Sell: Tesla Motors Inc (TSLA)
I really like Elon Musk. I think he’s one of the most interesting people alive today, and it’s entirely possible that, 100 years from now, kids in school will be reading about him the same way you and I read about the Morgans, Vanderbilts and Rockefellers of the industrial age.
But while I have all the respect in the word for Musk’s vision, his stock, Tesla Motors (TSLA) has no business in a portfolio of retirement stocks. It’s too risky, too volatile and doesn’t have the basic characteristics I like to see in a retirement stock: long history of surviving and adapting through economic cycles, good history of paying a dividend, limited need for outside capital, etc.
Tesla has none of these. It’s also wildly expensive, trading at 85 times earnings and nearly seven times sales, and will face tough competition from existing automakers in the years ahead, as well as potential upstarts like Alphabet Inc (GOOG, GOOGL) or Apple Inc. (AAPL).
If you want to own a piece of Tesla, go for it. Just don’t do it with your retirement money.
Retirement Stocks to Sell: Amazon.com, Inc. (AMZN)
Amazon (AMZN) may be the single greatest growth story of our generation.
Founder Jeff Bezos essentially invented internet commerce as we know it today, and he’s disrupted the brick-and-mortar retail sector in a way that few could have imagined 20 years ago. And Amazon turned the world upside down a second time with its cloud service, Amazon Web Services.
But Amazon at current prices is a trade, it’s not a retirement stock. Amazon has been growing its sales at a 28% clip … but it’s also priced like a company that is growing at a 28% clip … and one that will continue doing so forever. At current prices, AMZN is trading for 300 times earnings and three times sales.
Again, I have the utmost respect for Amazon. But its cloud services will only face increased competition from Alphabet and Microsoft Corporation (MSFT), among others. And while Amazon might maintain its place as the leader here, its growth should slow in the years ahead.
So, while Amazon might be a great trade, I’d be very careful with it as a retirement stock. You’d be better off dumping it.
Retirement Stocks to Sell: Twitter Inc (TWTR)
Well … maybe. There might be a Big Tech company out there with more money than sense that would want to buy Twitter.
But why would they?
Twitter is having a hard time growing its user base, even while rival Facebook Inc (FB) continues to expand from a much higher base. It’s not even certain that Twitter has its business model down. Rumors still circulate that Twitter is considering dropping the 140-character maximum for its messages. It’s a little late in the game to be reworking the product.
On a side note, I estimate a quarter of my Twitter followers are bots. That’s a real problem for Twitter’s profit model, which assumes real human eyeballs looking at real advertising content.
We’ll see what happens with Twitter. Who know, they might pull a rabbit out of their hat and turn it around. But I wouldn’t want to bet my retirement on it.
Retirement Stocks to Sell: Valeant Pharmaceuticals Intl Inc (VRX)
Valeant Pharmaceuticals (VRX) went from being the darling of the hedge fund masters of the universe to being an absolute whipping boy. The stock is down more than 90% from its 52-week highs.
I actually think Valeant is worth a stab at current prices … but as a trade, not as a retirement stock. I’m extremely wary of pharma and biotech stocks as long-term holdings because they operate in an industry that is one of the most prone to disruption from up-and-coming competitors or changing government regulations.
You can definitely do well investing in this sector. But you don’t want to risk your retirement on it.
At current prices, Valeant trades for 0.76 times sales and three times expected forward earnings. Now, to be fair, the company has also in technical default on its bonds for failing to report its financial statements in a timely fashion.
So while Valeant is dirt cheap, it’s also fairly risky. So if you buy Valeant, do it with your speculative capital, not the funds you need to live on in retirement.
Retirement Stocks to Sell: iShares Core US Aggregate Bond ETF (AGG)
I’ve beat up on stocks for a while. Now it’s time to beat up on bonds too.
Bonds have been a staple in virtually every retirement portfolio since the dawn of retirement as we know it today. But at today’s yields, it simply doesn’t make sense to own bonds.
Take the iShares Barclays Aggregate Bond Fund (AGG) as an example: This is a standard bond exchange-traded fund that tracks the same bond index that most fixed-income mutual funds track.
Well, at today’s prices, it yields an almost embarrassing 2.3%.
If you hold a quality bond to maturity, you really have no “risk” to speak of. You’re going to get back the par value of the bond at maturity. (We’ll discount reinvestment risk and default risk for now to keep it simple.)
But with a standard bond mutual fund or ETF, there is no maturity. The fund is presumed to be perpetual. So should bond yields start to rise again — and they will, at some point — you’ll looking at significant losses. When bond yields rise, bond prices fall.
If you’re going to own bonds, own them outright as individual holdings. But you should dump bond ETFs like AGG from your retirement portfolio.
Retirement Stocks to Sell: JCPenney Company Inc (JCP)
You probably don’t own battered retailer JCPenney (JCP). And you probably don’t shop there either. And that’s really the point I’m making here.
JCPenney is a retailer from another era trying to survive and turn the ship around at a time when much better-run retailers are getting killed by the likes of Amazon and other internet retailers.
JCP is definitely a cheap stock. At current prices, it trades at just 0.21 times sales. But how well will JCP hold up next time we have a recession? My guess is “not well.”
It’s debt load is enormous; JCP’s debt-to-equity ratio is a staggering 381%. That would be high even for a stable company with non-cyclical cash flows, let alone a struggling retailer in a cutthroat business.
If you want to go value hunting in JCP, go for it. The company might end up surprising a lot of people. But it most certainly does not belong in a portfolio you need to fund your retirement.
Retirement Stocks to Sell: Enterprise Products Partners L.P. (EPD)
I have to be careful here because I’m long Enterprise Products Partners (EPD) and consider it a great stock to own for the long haul.
EPD throws off cash like no one’s business and has raised its distribution every year since 1998. At current prices, it yields almost 6%.
So, what’s not to like here?
As much as I like Enterprise Products, it is a terrible stock to hold in a retirement account like an IRA. As an MLP, Enterprise Products is not subject to taxes at the entity level … which would normally be fantastic. But it can wreak havoc on non-taxable investors because MLPs can throw off what is called unrelated business taxable income (“UBTI”).
In a nutshell, if your IRA has too much UBTI, you could be required to file a tax return for your IRA … in addition to the tax return you file for yourself.
Is that a crisis? No. But why mess with it if you don’t have to?
If you own EPD in a retirement account, dump it. You can always rebuy it in a regular taxable brokerage account.
As of this writing, Charles Sizemore was long VRX and EPD.