Consider valuation, target price in profit taking

It is a sign of growing investor concern when first-quarter earnings are better than expected, interest rates remain low and inflation is mild, but the stock markets react negatively. The focus is increasingly on energy costs and the possibility of a so-called “soft patch.” (Interesting how Wall Street coins words and phrases to describe economic and market conditions. It wasn’t that long ago that we were inundated with talk about the “new paradigm.” Wonder what will be the next buzzword or expression?)

Sometimes it’s best to keep some investment cash in reserve. This is one of those times. Trying to time the market is an exercise that has seldom worked for the long-term investor, but ignoring a market trend can cause some disquieting days. The trend as I write this is downward. The positive earnings are not convincing to many. So, what do you do?

First, look at the valuations of the issues you own. Are they within the valuation range you determined when they were selected, or have they reached the upper limits that you set for them? If they are within 10 percent of their target price, consider taking some of your profits – especially if you hold the issues in a tax-deferred account.

To resurrect another Wall Street cliché, “Nobody ever went broke taking a profit.” If the fundamentals are intact, determine the level at which you would repurchase. If you are truly a long-term investor with several years experience, you have gone through this before. You know that when doubts are high and pessimism is thick, the time is right for acquiring good companies at reasonable prices.

But beware (here goes another one) of “trying to catch a falling knife.” You may miss out on some initial moves, but let the price trend of the issue tell you when it is time to buy. For many investors that means looking at the technical indicators.

For us at Saint Louis Investment Advisors, it means seeing relative strength and both intermediate and short-term stochastics that are moving upward from below the 20 line. Ideally the 200-day moving average is trending upward and the price of the stock is above that average.

Be particular and disciplined. Don’t try to anticipate the direction of these indicators – let them give the signals and then act. (Easy access to definitions and use of these indicators can be found on Yahoo! Finance. Or ask your broker or financial adviser to help you.)

Sell in May and go away?

Never heard of St. Leger’s Day? If you haven’t, you probably will. It’s the day that marks the end of the period referred to in the aphorism, “Sell in May and go away until St. Leger’s Day.”

So what does that mean, and should we even care?

First, St. Leger’s Day is the day, usually in the middle of September, when the St. Leger’s horse race is run in Doncaster, England. For many Europeans, it is considered the end of the holiday period (yeah, I know, we call it vacation).

Because Europeans take more extended vacations and do so primarily from June through August, the investment volume in the stock markets frequently falls. Falling volume in turn generally means falling prices – thus the admonition to sell in May and go away until St. Leger’s Day, truncated by us Colonists to “sell in May and go away.” (Interestingly, when we use the expression we don’t set a time for returning.)

Statistics on the merit of this advice aren’t compelling relative to U.S. markets, but check this out: In the last 40 years, investors in the European markets made about 10 percent holding their investments during the period November through April, while the markets generally drifted sideways from May through September. The numbers get even better if the date to return is the start of the European shooting season, Oct. 1. To quote an English financial writer, “That final fortnight in September makes all the difference, because it marks the end of the U.S. mutual fund year when funds sell stock like crazy.”

Should we act on this information? Not unless we are investors in nondomestic markets, which an increasing number of investors are via foreign country-specific Exchange Traded Index Funds and mutual funds.

As far as I am concerned, ignore it. Too often, what has worked in the past and has been identified and blessed by the gurus of Wall Street fails to work once it reaches a heightened public awareness. Instead, continue selecting your holdings on the basis of the screens we have written about above and over the past six plus years. (If you are a new reader, check out those discussed in previous columns available in the archives on the SBJ Web site.)

Heck, if investing were always easy, everyone would be wealthy.

Clark Davis is a 35-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

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