The Globe and Mail

  "Sell" seems to be the hardest word


Wednesday, April 18, 2001

One malaise that affects many brokers and mutual fund managers is that it’s as hard to get them to utter the word "sell" as it is to extract an apology from a teenager.

Some would say that this is because stocks move upward over time, so holding is essential. On the other hand, a cynic would suggest it is because, by continuing to manage your money, they score a percentage of your assets. Whatever.

Investors sometimes choose to eschew selling when the time is ripe because of the impending threat of capital gains tax. While minimizing tax payments is something we strongly advocate, there is a time when paying the piper is the ultimate strategy. As a general rule, the best way to offset your gains is to sell losers -- and if those washouts should appear ready to revive, buy them back after the 30-day grace period.

At Contra, we rejoice in the word "sell." Except for when we are dispensing with our losers for tax loss or fundamental reasons, we are nearly always selling because our firms have reached their target price and the time has arrived to take a profit. Profits are the eight-ball that, when pocketed, indicate the game is won, and they are the ultimate goal of the exercise of investing.

When we buy a stock, we always establish a target price for the sale. This effectively anchors us, as a decision is made on the company when our emotional attachment is nil. In the past month, though, two of our winners were sold before this goal was reached. Why? There were a couple of general reasons.

The first is that the stocks' valuations remain high by many yardsticks. The second is that, if bearish psychology reasserts itself, investors may scream "Sell!" over the objections of their advisers. We want to jump before they do.

The first sale was Occidental Petroleum Corp. (OXY-NYSE). Our purchase price was $17.50 (US) with a target price of $32.50, but we ultimately sold at $25.34.

We felt there were a couple of reasons to jettison this outfit early. For one thing, managers awarded themselves what we consider excessive remuneration. And, while the firm is paring the debt load, we doubt it will do the job as fittingly as these heady times dictate.

On a broader note, we still hold three oil stocks in our portfolio. With this sector remaining hot, we felt it was an excellent time to take a profit and reduce our exposure.

The second sale was Spar Aerospace Ltd. (SPZ-TSE) at $12.44 (CDN). Our purchase price after two returns of capital was $4 and our target $13.75.

Spar appears to be moving in a positive direction. Its chief executive officer, Tony Caputo, is a proven commodity and, as growth is the mandate, it is likely that Spar will make an acquisition in the near future.

Also, it was not long ago that management’s desire was to sell the firm, so perhaps there are still some takeover artists by the sheaves. And the recent increase in the dividend to 84 cents a share -- at a time when interest rates are tumbling -- makes the firm more attractive to income-oriented investors.

But with the increase in the stock value, the dividend yield decreased to 6.5 percent -- still good, especially with the dividend tax credit, but not quite as mighty as when the stock price was at lower levels. After the recent sharp price appreciation, this firm could cool off. We grabbed a last dividend and sold.

The stock prices of these firms may remain on an uptrend. It is rare that we sell near the price peak, though not for lack of trying. Selectively trimming winners is our priority at this point.

There is indeed a time to say "sell," even if the stock’s value is below one’s initial target price. While a goal should always be set, there is no reason to marry it.

By the way, anyone who was brassy enough to short Motorola Inc. (MOT-NYSE) when we mentioned it in January when it was above $20 (US), might consider covering their position at the current level. It closed yesterday at $14.