Deciding when a value play becomes a value trap is a billion-dollar question in the investing world. It's one that seldom fails to spark a debate, if not a fist fight, between traders and the buy-and hold camp.
"Breakout" invited Ted Parrish, a principal at the Henssler Financial Group, to join us to share his view of the investing world. The question here isn't so much how to find "value" -- for that I highly recommend Warren Buffett's annual letter to investors as a starting point. The real issue, and what value players are loath to discuss, is how do you know when to sell?
Parrish ran through a variety of strategies, depending on the situation. Most critically, he starts from his investing goal. "My bogey is to actually get about 12% a year out of each company I own," he says. After that, the portfolio manager gets case-specific with a hard rule that he sells when he feels like "there's no way they're going to grow the business." Having established his ground rules, we looked through some of his favorites:
General Electric (GE): This is a core holding of Parrish's and, as such, he looks to buy dips as opposed to looking for the exit. It didn't take all that much bravery to buy GE initially, Parrish says, "but it took guts to buy more" when the price was in the single digits. By adding to a position where his fundamental work suggested there was value, Parrish was able to lower his average cost on the shares. This "buy the dip" M.O. Is the quickest way to differentiate between traders and value players.
Cisco (CSCO): He's been "in and out of (Cisco) over the years," and the strategy has saved him a ton of money, as the long-term chart of the stock shows. He's got the stock on a short leash, particularly with Cisco's business arena heating up. It's name where Parrish is looking hard for ways Cisco is going to achieve growth.
Apple (AAPL): Yup, Parrish, a value guy, likes Apple. Not only has the company not yet given him a fundamental reason to sell, he still regards it as cheap based on its price/earnings to growth ratio.
Archer Daniels Midland (ADM): Parrish regards the artificial demand for corn to make ethanol as a win-win for ADM. The company makes agricultural products that benefit from rising crop prices, as we've seen recently. "The demand for corn is going to go up regardless," he says.
Buy 'em cheap, set your target and don't get greedy. For those of you looking to play the value game, check out the video and learn how a skilled value guy goes about getting long the unloved stocks while not losing his shirt.
- artificial demand
- General Electric
- Archer Daniels Midland