As I like to do rather than just execute the trades for model followers with research provided on new buys, I wanted to share a little more about the thinking that goes into my decision-making process. I am executing a complete sell and a buy for Top 20, and I am adding two names against the elimination of one and the reduction of three in Conservative Growth/Balanced. For the benefit of subscribers, I won't mention the names in this post. If you would like to have that knowledge, sign up for a free trial.
In Top 20, I have mentioned now for the past two weekly comments on the IBM blog, I have a name that I want to add. It's actually one that we bought in March 2009 and sold late in 2009 up 100%. The stock is trading about where we sold it (which turned out to be very premature). There is a bit of a short-term issue that is creating the opportunity. I am adding less than I would like to add due to some uncertainty. The sell is very difficult! All of the stocks in the Top 20 have very good expected returns (stocks are cheap or Alan is too optimistic), with a range of 30% to as high as 110%. The stock we are selling is up 82% so far this year. I continue to believe that it has more to go, perhaps 33% if it achieves my target over the next year. With that said, our addition has a 50% expected return and is a better company with higher long-term growth potential. Our sell candidate is in the right place at the right time, but it is pretty overbought. Not an easy decision, but that's the challenge. I decided to retain two names (also smaller positions) with similar expected returns and hope that our sell proves to be the right choice. More importantly, I hope that the buy works out.
We are overhauling CG/B. We are adding back a name (in the food industry) we recently sold - it has declined slightly in a rallying market. I think that the fact that it is domestic only at a time that the dollar is weakening is the big issue. We are funding that with the partial sale of a multinational food company that is offering 20% total return by my expectations over the next year, 8% less than the purchase. I am hanging onto a remnant because it is a great chart and not too overbought. The new position is small. I believe that they may benefit from a consolidation, whether they are the buyer or not. If that takes place, I might make the position larger (or if it drops in price a bit).
The next trade for CG/B is a new name that is also an old name. We bought this industrial at the inception of the model (July 2008) at 27 and sold it partially at 36 in September 2008 and the larger piece at 20.63 near the depths of the market in December 08 (ouch, but it did drop 10% over the next two months). In any event, the stock recently reached almost 42 at the peak in April and now trades on top of big support at 28. I think that it can get back to 42, suggesting almost 50% return over the next year including its dividend, which has been hiked every year for almost 4 decades. The company has heavy exposure to construction materials, which is not exciting on the top-line, and it has pretty high domestic exposure. The CEO who joined in 2008 walked into a storm, but I expect that he will deliver on his promise to boost margins. We are funding this one by selling a small remaining position in a Healthcare name that offers 20% upside and trimming our two recent Consumer names that popped 20% after we bought them. I prefer our 3 remaining Healthcare names to the one we are selling, and we have plenty of Consumer exposure.
I hope that you find this useful. Feel free to comment here if you have any questions!