Taking Stock

Tony Crowell

When To Sell

Apple hesitated briefly and then went through $700 a share. That’s twice its low of the last year, a period that saw it claim the title of the world’s most valuable public company. I’m asked now if I think it will split its stock. I don’t know, however, it really doesn’t matter. Splitting changes only the popular perception of a stock, much like counting the curtain calls of an opera diva. In both cases, the importance lies in the performance.

Its performance has been unmatched, raising concerns that any stumble would unleash a wave of selling. A minor stumble at some point is quite likely but Apple’s still reasonable valuation of 13 times estimated 2013 earnings provides a margin of safety. Its recent dividend that gives it a 1.5% yield is another cushion, particularly since the company will probably initiate a policy next year of annual dividend increases.

There seems to be a tendency among many investors to “take profits” by selling their winners. They probably would be better off if they sold their losers and let their profits run. They would certainly do even better if these mechanical steps were replaced by a thoughtful analysis of the prospects for the company in question.

Like most rewarding actions, this takes time and effort but using the advantage of time can give individual investors an advantage over high speed traders on Wall Street, whose bonuses depend on computer driven quick decisions. Their rapid trading reminds me of a comment from my Navy days, “there is more to the art of combat leadership than the ability to make wrong decisions quickly.”

Selling decisions are often more difficult than buys, probably because investors develop feelings of ownership and are reluctant to part with something with which they have become identified. They should try to avoid emotional attachments to stocks, perhaps with the assistance of the comment by Nathan Rothschild. He was asked the secret of his trading successes and replied, “By selling too soon.”

This comment should be remembered when popularity and publicity drive a stock price above a base supported by real results. Facebook comes to mind. So does Petrochina, China’s biggest oil company, whose stock price shot up to twice its present level five years ago. That briefly gave it the title of the biggest market cap, which seemed well ahead of any reasoned valuation and was probably due to very active buying by Mainland Chinese enjoying recently eased stock trading restrictions. Its stock then peeled off into a dive and I was doubly gratified when Mr. Buffett also sold his positions a week later.

In summary, selling should be considered when there is either a huge hyped run or a fundamental adverse change in a company’s business such as Netflix’s shift toward selling online content. Another reason, which you will seldom hear from the televised commentators, is in order to buy something that looks better. At the moment, I don’t see anything that looks dramatically better than Apple and would use any dips toward $600 to buy more.

I am renewing my buy recommendation of American Realty Capital (ARCT-$12). It yields 6% currently and agreed on September 6 to be acquired by Realty Income (O-$41). The combined business will be among the 20 largest REIT’s with over 3,000 properties. Most properties are leased to investment grade tenants like FedEx and CVS under net leases. Both companies have a record of providing steady income through gradually rising monthly dividends.

Pairing an income stock like ARCT with a growth stock like Apple makes sense. So does sticking with your winners and even adding to them. As Mr. Buffett says, “Sometimes the best stock to buy is already in your portfolio.”

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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