There’s an old market axiom that goes something like this: You can’t go broke taking a profit.
Of course, for every piece of a conventional wisdom, there’s usually a piece of counter-wisdom, such as “let your winners run and cut your losses short.”
Both can be useful, depending on the circumstances.
In this space in recent months I’ve highlighted rich market valuations and overly optimistic investor sentiment. As both of these conditions persist, I’m very concerned that any gains in the market would only be erased entirely and then some at a later date.
After the shellacking many retail investors suffered in early February,, their views of the market changed. Realizing that stocks can actually go down will do that! We’ve since seen investor sentiment normalizing a bit, as record amounts have been pulled from exchange traded funds. But sentiment has not swung to the other side of too much pessimism.
Which is to say, the risks are still present and dangerous.
As a result, in Hidden Profits this month, I followed the first maxim and booked some large profits in three of my recommendations, all around 50%.
Earnings season is upon us, and, with the recent uptick in market volatility, anything can happen going forward. While tax reform generated some market tailwinds, my view is that any company that whiffs even a little bit on their earnings release or guidance will face the wrath on unrelenting selling by investors.
We’re now longer at the stage of the market cycle where free hall passes are being given out.
It’s like the old mafia members in the movie Casino trying to figure out who to whack to save their own hides. Alas, they wipe everyone out: “Why take a chance?”
Interestingly, while I’ve been cautious on the market, two of my biggest winners were conservative investments. One is in the unloved refining business. Far from sexy, Valero (NYSE: VLO) has solid operating performance and earnings quality. In fact, it’s at the top the rankings in my forensic accounting software.
Our biggest winner, Wyndam Worldwide (NYSE: WYN), is a hotel and vacation operator that had taking a beating just prior to my recommendation to buy the stock. What we viewed as the “Apple of hospitality” has had an unrelenting move to higher prices. I have no doubt the business is well managed and operating performance has been strong, but the stock is ahead of itself, in my opinion.
Finally, we booked a profit in QVC (NYSE: QRTEA), which is led by industry veteran John Malone, who sports a track record that rivals the legendary Warren Buffett. It’s a solid business that we also recommended after a short-term decline. Great managers and loads of cash flow are a wonderful combination, as the pick has proven.
During the exercise of reviewing all of the positions very closely, I made another observation…
A couple of the very best opportunities in the portfolio are trading a touch below my ideal buy-up-to price, but nothing has changed to alter my opinion of these stocks. In fact, the fundamentals have improved. That just hasn’t been recognized by the market.
That’s the hidden profit: well-run companies with good operating performance but a misunderstood opportunity.
If the investment thesis plays out as expected, that only means even bigger returns. They’re out there, even in this up-and-down market.
You just have to know where to look.