Short Sellers Are Betting Against GE, Exxon And Apple. What Should You Do?

I’ve never made a dime buying a stock. And neither, I’d be willing to bet, have most of you.

The catch?

Simply this: If there’s a profit to be had from the purchase of a stock, then you and I won’t see a penny of it until those shares have been sold (except for dividends, of course).

You know the formula: Buy Low + Sell High = Profit

The key to making money in the stock market lies as much in knowing what and when to sell as in knowing what and when to buy.

And that’s a formula that plays right into the hands of Stock of the Month’s Amy Calistri, much to the benefit of her followers.

The beauty behind Stock of the Month is its simplicity: Each month Amy brings readers just one pick she believes is poised to move higher. Then she adds it to her $100,000 real-money, model portfolio.

Amy intentionally caps the advisory’s portfolio at just 12 holdings. That means she has to sell a previous pick in order to make room for a new one.

In other words, in Stock of the Month the selling portion of the profit equation is just as important as the buying portion.

So began the Feb. 4, 2012, edition of StreetAuthority Insider, which I invoke this week for one simple reason: The matter of selling is every bit as relevant today as it was back then — perhaps even more so, what with many stocks hovering near 52-week highs and with the market itself at historic highs.

And when it comes to the question of whether to hold or fold, this poker aficionado clearly has a keen sense of knowing when to take money off the table.

Amy’s 43 closed Stock of the Month trades had an average total return of 16.7% and beat the S&P 500, on average, by 3.1 percentage points. Since she sold these 43 positions, however, they have lagged the market by 7 percentage points.

In other words, Amy — and her followers — are buying low and selling high much more often than not. (An astonishing 84% of Amy’s closed trades have been cashed out in the green. Stock of the Month subscribers can see the list of Amy’s closed trades here.)

Some examples…

Last July Amy recommended Paris-based Pernod Ricard (OTC: PDRDY), the world’s second-largest liquor and wine manufacturer. (The largest? That would be the UK’s Diageo (NYSE: DEO), which itself contributed a 34.2% gain to the Stock of the Month portfolio in a 14-month period during 2009-2010.) One of the main attractions of Pernod Ricard for Amy at the time was the weak euro, which made the French company’s products more competitive on the world market and which made its shares cheap when priced in U.S. dollars.

By the time the euro had strengthened some seven months later, Amy booked a 25.4% return on Pernod Ricard, beating the market by 12.1 percentage points. In the period since Amy took her profits on Pernod Ricard, moreover, the share price has dropped 6.3%, trailing the market by 15.5 percentage points. Advantage: Stock of the Month subscribers.

Amy picked up shares of Hasbro (Nasdaq: HAS) on the cheap in December 2009, before Wall Street saw what Amy saw: an “old school” toy maker that was transforming itself into a company with multimedia brand power. In a little over a year, Hasbro returned 45.9% to Amy’s portfolio, trouncing the broader market by 28.2 percentage points. Since Amy’s sale of HAS in January 2011, shares have risen a further 8.2% but have trailed the market by 20 percentage points.

The story’s the same with IBM (NYSE: IBM), which beat the market by 35.5 points during the nearly two years Amy held it. In the time since she cashed in her IBM shares with a 49.6% gain in January 2012, Big Blue has trailed the market by 19.5 points.

You get the idea.

[And for even more ideas, follow this link to “The 12-Minute Portfolio.” Twelve worry-free minutes a month is all the time you’ll need to begin to capitalize on winning investment ideas like those I’ve just described. In this presentation you’ll hear Amy talk about her winning strategy, and you’ll learn how you can take advantage of a special offer to become part of the Stock of the Month community. (For the text version, click here.)]

In the meantime, here’s more from Amy…

Bob: What distinguishes Stock of the Month from the rest of the crowd?

Amy: When I launched Stock of the Month, I wanted it to be a round-trip advisory. Investors get bombarded with buy recommendations all day long. But few advisors or analysts are there to see them through to the end. And the profitable end is what it’s all about. For instance, think of all the analysts who were touting Apple (Nasdaq: AAPL) last year. Where are they now? Did they get investors out before Apple tumbled more than 30%? Or did they just leave them hanging?

Selling is hard. So I expressly designed Stock of the Month to enforce selling discipline. Most investors are analytical when it comes to buying. Emotions, however, sometimes get in the way of good selling. That’s why I limit my holdings to 12. Every month when I buy a stock, I have to apply a little tough love to the rest of my holdings. The one with the least probability of beating the market going forward gets the ax.

Bob: I know that you go through a rigorous process to select the stock you eventually buy each month, sifting through reams of economic, industrial and company-specific data to find compelling trends. What is your selling process like?

Amy: In a sense, it is the very same process. I revisit all the trends that compelled me to buy a stock in the first place. For instance, I initially bought IBM in March 2010 because of a strong uptick in business spending. Computer and semiconductor shipments had been strong in the fourth quarter of 2009 and many of IBM’s competitors were already outperforming the market. After I bought it, IBM followed suit. But almost two years later, big multinational tech companies like Oracle (Nasdaq: ORCL) started warning of lean times ahead. The slowing global economy was taking its toll on business spending, specifically in China and Europe. I heeded the warnings closed out my position at a market-beating profit.

I bought BRE Properties (NYSE: BRE) when the residential housing market was still soft and homebuyers were still cautious. This apartment real estate investment trust (REIT) benefited from the strong demand for rentals. But as housing started to rebound, the rental trend was starting to wane. So I sold BRE for a nice 13.4% total return, outperforming the S&P 500 by 3 percentage points. Since my sale, BRE has gained another 3.8%, but the S&P 500 is up by more than twice as much.

Bob: So what have you sold lately?

Amy: In the May issue, I sold Hubbell (NYSE: HUB-B). As you know, I try to buy a great stock every month. To make room for a great stock, I have to sell the stock of a good company — but one with less upside potential going forward. It means I often sell the stock of a company I like. I still like Hubbell, an electrical products supplier. The company provides lighting systems for both commercial and residential construction, and transmission equipment for the telecommunications and power sectors. I bought HUB-B last summer, when construction spending was on the rise. HUB-B did well in this environment and delivered a nice total return of 27.4% in less than a year’s time, outperforming the S&P 500 by 4.1 percentage points.

But non-residential construction spending has started to level off. In its financial results for the quarter ended March 31, Hubbell’s margins contracted a bit due to a pricing environment that management categorized as “a lot more challenging” than the previous year. So while I like this stock in the long term, I felt it was less likely to outperform the market in the short term. To be an efficient seller, you can’t fall in love with your positions. You have to be able to let them go when it is time.  

Bob: Last month, you cashed in on half of your holdings in the online media company Yahoo (Nasdaq: YHOO). You had a 50% gain, but Yahoo has run up since then. Do you have any regrets about selling a portion of your holdings?

Amy: Not at all. Any day you can close a position for a 50.2% gain in less than nine months is a good day. It’s even better if you’ve outperformed the S&P 500 by 37.9 percentage points. The other half of my position is up nearly 70%, and that’s just as I hoped it would be.

When I first bought Yahoo, it had limited downside risk. It had just hired on a new and inspiring CEO. It had a valuable stake in the Chinese Internet company Alibaba Group. I still like Yahoo’s prospects. But it is still a turnaround in the making, and the stock has run up a lot since my purchase. And it was time to take some profits.

Action to Take –> Most investors worry too much about missing the top. As a result, they tend to hold on to a position too long — long enough to watch their gains erode. I care less about where the top is than I do about locking in the lion’s share of the gains. When I close my remaining holdings in Yahoo, I’ll have captured the lion’s share.

P.S. — If you want to be among the first to know when enough is enough for Yahoo, click here to take advantage of a special subscription offer for Amy Calistri’s Stock of the Month. Same drill if you want a legitimate crack at discovering the “next Yahoo.”