Published by: Lyon Capital Management, LLC - A Registered Investment Advisor
24B Grove Street * Pittsford, NY  14534 * Tel: 585-248-9821
www.lyoncapital.com

	The Art of Selling a Stock
	How Have They Done?
	S&P's A+ Equity Rankings

The Art of Selling a Stock
By Doug Lyon, CFA

When most people think of investing they think of buying a stock or bond.  But buying is only half the equation.  Knowing when to sell an asset is just as important. And often it is a more complex decision.

When most investment advisors discuss their investment style they speak only of what method they use to select a stock for purchase.  In this article we’d like to elaborate on the method we use to determine when to sell a stock. 

Selling on The Up-side

The parameters of the “sell discipline,” as it is sometimes called, begins with establishing goals for what we expect a stock to do.  When we first purchase a stock we have a goal for the up-side of the investment.  To put this in more concrete terms:  The upside goal is to reap a gain of 50% over three years, which is a 15% annual return plus any dividends. When the stock reaches the up-side goal we often take profits by selling some or all of the position. If the stock appears to have strong fundamentals and continued strong growth potential, we will continue to hold a portion.

Selling on the Down-side

We also have an idea for how low we think the value of the investment could possibly go.  We recognize that stocks don’t always go up, even when we have done our best to select investments we think will increase in value.  When a stock goes down more than 20% from the original purchase price then we re-evaluate the investment.

One may ask,“Why 20%?”   Simply put sometimes out-of-favor stocks (the type of stocks Lyon Capital Management buys) go down before they head back up.  Unlike growth investors we are not buying stocks already on the rise (usually more expensive) and selling at the first sign of bad news.  Often the companies we buy may go lower because of recent bad news or market trends. In addition, in today’s more volatile market it is not unusual to see large swings in the value of a stock.  A stock may rapidly go down 5,10, even 15% and then quickly rebound.  If one has a discipline to always sell when a stock is down, say 10%, one may miss out on an opportunity and incur an unnecessary loss.

A decision to sell is based on how the company is performing.  We ask questions such as:  Is management following through on their stated initiatives such as cutting costs, selling off under-performing divisions, or expanding in new markets? Is the company’s debt level falling? Are margins improving?  If the answer to any of these questions is,      “ No,” we re-evaluate whether or not we should continue to hold the investment and we may sell.  It is important to exit a position when one has lost faith in an investment.

Buying on the Down-side

If, however, the reasons we bought the stock in the first place are still in place, a lowered price is an opportunity to buy more.  And often that is what we do.  If we have strong confidence in the stock, even after a 20% drop, we’ll purchase more.

Tricks of the Trade

To hedge when we first start investing, we sometimes buy a small position.  The idea is to begin small and then add to the position as the price goes down.  When we buy we try to do so at what we believe is the lowest price; however, buying at the lowest possible price is almost impossible and is almost a matter of luck.  So when we buy at what we think is a good price we are fully prepared for the price to go lower, to take advantage and buy some more.  The bane of buying undervalued out-of-favor stocks is that they can become more out-of-favor (meaning the price goes lower) before the value is realized by the marketplace and the price goes up.   The reward is buying quality companies at bargain prices and earning good returns on investments while taking below-average risks.   It is a strategy that may not be as glamorous as buying a stock when it is on the rise, but it certainly carries less risk.  And for conservative, patient, long-term investors it is a more desirable, and often more rewarding strategy.$$

S&P's A+ Equity Rankings
by Doug Lyon, CFA

Standard & Poor’s is an independent rating agency well known for its rating of fixed income securities (bonds).  But Standard & Poor’s also rates and ranks common stocks.  Investors are familiar with Morningstar ratings or Valueline ratings, but Standard & Poor’s long standing assessment of common stocks is sometimes overlooked…but not by us!

 Fixed Income Ratings

A Standard & Poor’s (S&P) rating is like a seal of approval for a fixed income security.  Sale of a fixed income security without an S&P rating is difficult.  The rating is an assessment of the capacity and willingness of an issuer to make periodic interest payments and to repay principle. 

 Equity Security Rankings

S&P’s rankings for common stocks range from A+ (highest) to D (lowest).  The rankings are determined based on a company’s per-share earnings and dividend records for the most recent ten years.  Advantages of a company’s size from an investment standpoint are also recognized.  S&P points out that rankings are not a forecast of future market performance but merely an appraisal of past performance.  As we all know past performance is no guarantee of future results.

Having said that, a high ranking indicates to us that a company has built an advantage in the marketplace that has been rewarding in the past and is likely to be rewarding in the future.  If the business is not becoming obsolete and the company’s stock is not over priced, we believe that top ranked companies by S&P make good investments.

Ben Graham, the father of modern security analysis, recommended the intelligent investor have A+ rated securities represented in a portion of his or her portfolio.  He believed that during market downturns these types of stocks hold up better than more speculative issues.  Speculative issues tend to do well when the market is strong but fall sharply (as we have seen so far this year) when the market is weak.

S&P ranks over 5,000 common stocks and at last count roughly 70 of those were ranked A+.  You might be surprised to learn that market darlings like Intel, Cisco, Oracle, or Corning are not ranked A+ by S&P.  The reason for this is that they have too short an operating history or too volatile an operating history or both.  Examples of A+ ranked companies are Abbott Labs, General Electric, Merck, Wal Mart, Genuine Parts, Emerson Electric and UST.

An A+ Strategy

Lyon Capital Management clients own several A+ companies.  We believe a weighting equal to 20 or 30% of total stock holdings (or 4 to 6 different issues) is a good target for most portfolios.  This gives a good exposure to some of the world’s top quality companies.  And, it provides good diversification for a portfolio that also contains other types of securities.  If you have an interest in the S&P ratings and how we apply them to an overall investing strategy, give us a call.  We’re happy to talk it over with you. $$

24B Grove Street, Pittsford, NY  14534
Tel: (585) 248-9821