When to Fold ‘Em

[Wide Moat Daily]( When to Fold ‘Em By Brad Thomas, Editor, Wide Moat Daily My regular readers know me as a pretty positive guy overall. I know some of my coverage over the last few weeks has been sobering. But as a general rule, I like to consider myself an optimistic realist. The way I see it, there’s almost always an upside to act on, whether by advancing your career, strengthening family and friend connections, or expanding your portfolio potential. That’s why I write so much about investment opportunities. And I don’t see that changing anytime soon. If ever. However, as much as I enjoy telling you about profitable positions you might want to take… I do, in fact, acknowledge there are also times to sell. Typically, yes, I subscribe to a Warren Buffett-style buy-and-hold position. Buffett once said his favorite holding period for a stock is “forever.” As he once wrote to shareholders – and has repeatedly reiterated since: We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds. With that said, even Buffett sells sometimes… like his airline stock in 2020… or his more recent jettison of 389 million shares of Apple (AAPL), essentially slashing Berkshire Hathaway’s (BRK-A)(BRK-B) previous position by half. Because sometimes, for some reason, it just makes more sense to cut. For the record, this is not me sounding any kind of alarm. You might already know how I expect more shoes to drop in the months ahead. That’s why I cautioned two weeks ago to [keep some cash on the side](. But I’m not in panic mode, and I don’t think you should be either. I simply want you to be every bit as informed about when you should sell as what you should buy. Reason No. 1: A Company’s Fundamentals Have Broken There are several reasons why you should sell a stock. And I’m not saying the ones I list here cover everything. But I’ve selected my top five, starting with this “biggie”: If the company’s fundamentals are broken. Of course, we always want to do our due diligence before we buy shares. Yet even our best-educated efforts don’t guarantee a business will keep looking so good down the road. As I always say, there are no investing guarantees out there – and anyone who tells you otherwise is either lying or being lied to. Times change, sometimes suddenly and sometimes gradually. New competitors rise up. Bad moves are made. (More about that shortly.) And/or consumer interests shift. There are dozens of ways a company can lose its edge. And the majority of them do eventually. We ran into this situation recently in the pages of The Wide Moat Letter. Back in April, we recommended Nike (NKE) and added it to our model portfolio. We were expecting a “back to basics” restructuring from Nike, which had experimented with direct-to-consumer sales with little success. Unfortunately, it hasn’t worked yet… During the company’s first quarter (fiscal 2025) earnings, management pulled full-year guidance and had something of a mixed bag for the rest of the report. That’s all we needed to know. We recommended selling the stock for an approximate 6.5% loss, saying at the time: Lower fundamental growth expectations equate to lower dividend growth expectations (on an already low-yielding stock). In short, Nike no longer meets our quality thresholds. We’re going to sell our position, locking in mid-single-digit losses here rather than waiting to see how [the CEO’s] restructuring plans play out. Long-term, I’m sure Nike will be fine. But companies don’t deserve your investment. They only ever earn it. And, at least for the time being, I felt Nike had no longer earned ours. Selling the stock wasn’t fun. But it was the disciplined move to make. Too many investors fall in love with poor-performing stocks. It’s important to remember that stocks never fall in love with you back. Reason No. 2: Management Changes We always want to look for excellent executive teams in the companies we invest in. But that’s no more a foolproof strategy than buying up excellent companies (which, for the record, are always run by excellent executives). Sometimes, members of management step down. Sometimes, they get distracted. Sometimes, they get compromised. And then so does the company. This isn’t to say you should give up on every C-suite member who makes a mistake. Mistakes are inevitable whenever humans are involved, and street-smart managers can work their way out of most mistakes. But keep a close eye on them anyway, regardless of how capable you think they are… or even how capable they actually are! If management starts making too many bad decisions or moving toward making a big enough one, it’s probably time to say goodbye. A good example might be Boeing, which I wrote about [back in May](. For years, management took its eye off the ball and became more interested in financialization and outsourcing rather than building quality products. If management gets distracted like this, they don’t deserve your loyalty. Clearly, you don’t have theirs; they have other things on their minds. Reason No. 3: No Longer a Good Value You know the market adage: Buy low, sell high. Contrary to what many think, this does not refer to the nominal share price, which tells you absolutely nothing about an investment's value proposition. It’s all about valuation. That simply means looking at the price of the stock relative to some important financial indicator. We also ran into this situation recently. Back in September, I said of portfolio holding Intercontinental Exchange (ICE): After rising by nearly 28% on a year-to-date basis, ICE shares trade with a blended P/E ratio of 27.2x. That’s well above the stock’s five- and 10-year averages of 23.3x and 23.1x. It’s also above ICE’s 20-year average P/E ratio of 24.6x. Our fair value estimate for ICE is $135. Yet shares trade in the $160 area. That means that ICE shares are more than 15% overvalued. Here’s the important point: Intercontinental Exchange was still a great business, but the stock was no longer a great value. Both can be true at the same time. And so, we sold, locked in 73% profits, and looked for more appealing opportunities. Reason No. 4: It’s Time to Rebalance You can handpick your portfolio assets with the greatest attention to detail possible… and you’ll still find yourself needing to rebalance from time to time. Perhaps once a year. Maybe more. Maybe less. The general recommendation is for six to 12 months. But it really depends on your age, your goals, your risk tolerance, when you started investing, when you’d like to retire, and so on: all very personal reasons that can and do change over time. What doesn’t change is the purpose of rebalancing. It’s all about being properly diversified: Is your current setup best balanced to ride market volatility while providing you with what you want and need? Maybe, thanks to market movements and reinvestment plans, you find yourself lower in the precious metals category than you’d prefer. Perhaps your small-cap companies are taking up too much space while the economy looks set to cool. Perhaps you have a single holding that has performed very well and now makes up an uncomfortably large percentage of your portfolio. Rebalancing doesn’t have to involve a drastic rehaul of your portfolio. More than not, it only takes selling off some shares of some companies here and buying more there to put everything back in order. Reason No. 5: Personal Reasons Come Up Personal reasons can be equally important reasons to sell. Though by “personal reasons,” I don’t mean parties or vacations or other such luxuries. While you can, of course, cash in stock for such things, I wouldn’t advise it. Save up money on the side for fun expenses. Your portfolio money should be above that kind of “frivolity.” At the same time, while you should take your investments seriously, they’re not sacrosanct. That money is supposed to exist to make your life and those of your loved ones better. In which case, valid personal reasons to cash in stock might include: - Buying a house - Paying for a child’s education - Handling an emergency In other words, do what you need to do. Just be wise about it – which, incidentally, is good advice on when to sell and what to buy all around. Regards, Brad Thomas Editor, Wide Moat Daily [Wide Moat Research]( Wide Moat Research 1125 N Charles St, Baltimore, MD 21201 [www.widemoatresearch.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. Wide Moat Research welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-888-415-6046, Mon–Fri, 9am–5pm ET, or email us [here](mailto:feedback@widemoatresearch.com). © 2024 Wide Moat Research. All rights reserved. Any reproduction, copying, or redistribution of our content, in whole or in part, is prohibited without written permission from Wide Moat Research. [Privacy Policy]( | [Terms of Use]( | [Unsubscribe](