Become a Smarter Seller, Part 2

1. XM-Sirius Success Hinges on Concessions 2. Use Your Pantry to Pinch Pennies 3. TSC Power Stock Rankings: Apple 4. These Banks Need to Raise Capital Quickly 5. Top Rocket Stocks: Coldwater Creek

Editor's Note: This is the second installment of a two-part series. To read Part 1, please click here.

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"I always sell too soon."

-- Baron Rothschild

Back in 2003, I noticed that my personal account was starting to underperform, so I decided to give my portfolio a comprehensive tune-up.

I started by ranking my holdings in terms of expected returns. I compared each stock's price target with its current price, placing those with the highest percentages at the top of the list. My next step was to do the same for a list of replacement candidates.

When I reviewed the second list, I found that my top three replacement candidates beat the expected returns for the median company in my portfolio. I bought those three stocks, funding my purchase by selling the four with the lowest expected returns. At the same time, I added a small amount to two underperforming names in my portfolio. Here were my actions and the results through July 14, 2003, the date I sold Pechiney:

With the exceptions of Pechiney and Nucor (NUE - commentary - Cramer's Take), I still hold positions in all of the purchases. I threw in the towel on Pechiney when it hired investment bankers, as I thought management was fighting for their cushy jobs, not enhancing shareholder value. I was surprised to see them sell out to Alcan (AL - commentary - Cramer's Take). I sold Nucor in late 2003, over the rise in scrap steel prices. Even though Nucor can raise its own prices, its profits will not increase as much as those of other steel firms. I also goofed in my evaluation of Adtran (ADTN - commentary - Cramer's Take), because it had much better prospects than I thought.

Other companies on my list of purchase candidates had expected returns that exceeded those of companies remaining in my portfolio. However, they didn't beat the median expected return, which is where I set the bar to avoid excessive turnover.

The price return on the purchases vs. the sales was better by more than I'd ordinarily expect -- and faster as well. I look for returns on my portfolio to beat the S&P 500, and this series of trades certainly helped.

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At time of publication, Merkel and/or his fund was long Precision Castparts, Petrobras and Dycom, though positions may change at any time.

David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].

Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.