'Team Alpha' Portfolio: When To Buy And When To Sell

by: Regarded Solutions

I have received many questions from all types of investors who are interested in either following the "Team Alpha" portfolio, or inquiring when a good time to actually buy some of the stocks would be. The latest "portfolio report card" can be read right here.

Our Team Alpha portfolio now consists of McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NYSE:CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Linn Co, LLC (LNCO), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), General Dynamics (NYSE:GD), and iShares S&P U.S. Preferred Stock Index Fund (NYSEARCA:PFF).

With a current dividend yield of about 4.63%, based on initial purchases, this portfolio has rewarded investors with income as well as capital appreciation. It is only natural for newer investors to ask when a good entry point would be on any specific stock.

When Is It The Right Time To Buy?

Whenever an investor decides to begin building a portfolio from scratch, or even decides to buy a new stock, the entry price becomes part of the decision making process. For me personally, I let the fundamentals tell me if the time is right, but I do not get discouraged if the current price is at higher levels. I might wait a bit, but I would not dismiss my buying decision.

Here is what I look for:

  • I take a look at the forward P/E of each stock, specifically the mega cap blue chips that tend to be cyclical. If the P/E is in line with the market and the sector, that would be a positive for me.
  • I take a look at the dividend track record. Knowing that my first goal is for income, the dividend winning stocks that have consistently raised dividends year in and year out become targeted. Current share price becomes less important.
  • I will read any recent news about the stock to see if there are risk issues that I might have missed.
  • I look at the last earnings report to make sure that the company is still on track and that its balance sheets are in good shape.
  • I will also look at the RSI, or relative strength index, from a technical standpoint. I do not use this for anything other than for recent strong price rises that might be due to short covering or momentum trader purchases. If the RSI was above 70, I would wait for a pullback in the share price. If the RSI was under 30 I would still be a buyer at the current price. I do NOT use technical analysis to make investment decisions however.

If the brief list of things I look for pass the sniff test, then I am ready to buy. Some investors take the plunge all at once and buy their targeted allocation amount all at one time.

I believe a more prudent approach would be to chop up the allocation of shares desired into 1/4 purchases. I use one week time intervals unless a nice drop occurs, which might let me double my purchase.

The real question for me is whether or not I actually want the stock. If I do, I will own it sooner than later. Since the forward P/E level is my personal, most important indicator, before I even look at the other items on my list, here is the way it currently stacks up for the Team Alpha stocks:

Current P/E Stock
11.1 XOM
13 JNJ
13.5 T
12.5 GE
10.3 BKCC
19.2 PG
19.4 KO
na XLV
na PFF
18 O
5.8 KFN
17.1 WMT
13.1 CSCO
9.6 GD
18.3 BMY
14.1 MCD
11.1 CSX

XOM, JNJ, T, GE, KFN, CSCO, GD, CSX and MCD all make my initial cut and would probably be my first purchases. Next would be BKCC, KFN, PFF, LNCO, XLV, and O (since O is a REIT I allow for a higher P/E since it is not very important).

I can also immediately see that I would wait for a pullback on PG and KO.

Once I read the latest earnings reports and note the RSI, I would be ready to buy.

When Is It The Right Time To Sell?

For many investors, buying is easier than selling. There are times when it almost becomes an emotional attachment with some stocks. Especially when they are held for a long time.

I faced that with Annaly Capital (NYSE:NLY) several months ago. The business changed and yet I was quite reluctant to exit the position, since I had owned it for many years. That is a battle that prudent investors must fight. If the business changes for the worse, it is time to sell, no matter what other folks might say.

For the most part, I keep the selling decisions very simple.

  • If the business changes for the worse, I sell the entire position.
  • If the share price rises by 50%, I will take some chips off the table by reducing my position by 25%.
  • If the share price rises by 100%, I will sell half of my position and keep the rest, using the "houses" money.
  • If my allocations become out of line with my goals, I will rebalance all positions to keep the allocations in line with my own goals.

As a reminder, here are the current allocation levels of the Team Alpha portfolio:

Starting Lineup Allocation% Goal
O 6%
KO 3%
GE 8%
JNJ 7%
XOM 7%
T 7%
PG 6%
WMT 6%
MCD 7%
Starting Pitcher
BMY 5%
PFF 3%
KFN 2%
GD 6%
XLV 6%
CSX 4%
Cash 3%

I very rarely go above 10% in any single stock, and in this portfolio, the highest percentage allocation is 8%. Spreading the risks across sectors, stocks and industries allows for diversification, which will help reduce the overall risk profile of a portfolio.

If one stock takes a hit, it does not account for an overwhelming percentage of the portfolio's total value. We can recover much sooner and not face a catastrophe.

I suppose the most prudent advice I can suggest about when NOT to sell can be boiled down to just a few gut checks:

  • Never sell based on emotion.
  • Never sell based on a short-term fear reaction.
  • Remind yourself why you invested in the first place, and if those needs are still prevalent, think twice about selling.

The Bottom Line

Buying or selling any sort of security might be the biggest investment hurdles we face. After all, it is real money, and real profits or losses. Nobody wants to lose money and everyone wants to buy everything at the best possible price.

Unfortunately, there are no magic formulas that are right or wrong all the time. The best we can do is decide we want to invest and what we want to invest in that helps us reach our specific financial goals.

Please do your own research as this is my own opinion and not a suggestion to buy or sell any security.

Disclosure: I am long XOM, JNJ, GE, T, WMT, MCD, GD, KO, BMY, O, XLV, PFF, BKCC, KFN, LNCO, CSCO, CSX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.