Investing is not just knowing what stocks to buy, it is also about knowing when to sell and individual stock – the decision to sell can also become more difficult when you are dealing with a good company.
Our decision to sell if most often based on as stock exceeding or significantly exceeding (say by 25% plus) what we consider to be its fair value based on earnings or cash flows. If it is a great company that we want to own for say 3-10 years, the decision is more complex. We then take into account the general risk level of the stock.
We often break down stocks we look at into a couple of categories – particularly in our growth stocks research.
1. Long-Term Non-Cyclical Business BUYs (less risk)
2. Cyclical Stock BUYs (more risk)
Long-Term Business BUYs – companies with recession resistant businesses that are not dependent completely on a business cycle or commodity price movement. A great real world example of this would be a stock I have recommend here countless times, The Boyd Group (BYD.UN:TSX) a stock we have owned for the last 9 years buying originally at $2.30 – what they do is simple auto body and glass repair work – recession or not people tend to fix there means of getting from A to B.
Cyclical Stock BUYs – companies whose businesses are dependent on an economic cycle or an underlying commodity price such as an oil and gas producers or a gold stock.
We will tend to hold onto a stock longer if it is non-cyclical and well run, even if it passes its fair value near-term by 10% to even 20% at times as we are not in the business of timing in an out of a stock. However, if we are looking at a cyclical stock, such as an energy service stock, we are far more likely to SELL and take profits if the stock exceeds fair value – we have never gone broke using this strategy.
In fact we recently employed it with a stock we have recommended on this show a number of times – that being High Arctic (HWO:TSX). A classic case of a great cash flowing business – that services a very cyclical energy sector. We had actually owned the stock for 4 years buying originally $2.20, it has raised its dividend 3-times and we issued a SELL report to clients recently at $6.20. The stock returned us around 200%.
To be blunt, HWO was not terribly expensive. But given the fact that it services a very cyclical industry, which a number of trusted sources we look at believe may see a pullback in oil, we took the run up in the stock price of 65% over the past 5-months as an opportunity to crystallize our profits.
We saw fair value near-term at closer to $5.25, so the stock has exceeded this by almost 20%. We may actually buy back into it at some point as it remains our go to name for exposure to energy services, but we do not see cash flow growth over the near-term in that segment, so we are not invested there.