Stocks to Trade vs. Stocks to Hold

Over the past five years, which stock do you think had the higher return: Cisco (CSCO - commentary - Cramer's Take) or Ford (F - commentary - Cramer's Take)?

As we know, it's been a terrible two years for telecommunications hardware, whereas we've seen record sales in automobiles for three years in a row. So Ford is the obvious winner, right? In fact, since November 1997 Ford lost 76%, while Cisco gained 55%.

This comparison raises a question about holding a stock vs. trading a stock. If you operate on a buy-and-hold strategy, as I do, how do you distinguish between core holdings that will deliver good returns over a five-year time frame and those companies that you might trade -- noncore holdings that you might even sell short?

Start with Industry Analysis

There are about 16,000 stocks traded in U.S. markets, but only 115 industry groups (grouped among 12 sectors). One way of managing my research load is to develop opinions on sector or industry groups (see How to Choose the Right Sectors for This Economy), and then start choosing companies within attractive sectors. Sector and industry group level data are available from MarketGuide, Yahoo! Finance and Standard & Poors. You should also do qualitative research on top of looking at the numbers.

Although record numbers of cars were sold over the past year, the industry continues to gain capacity as foreign manufacturers establish factories in the U.S. To pay for these factories, you have to run production flat out. Some time ago, U.S. automakers gave up on making small cars at a profit -- but profits could be made on trucks, SUVs and minivans. Once profits on those units shrank, they turned to financing to prop up profits. But, with financing offers going to 0% to entice customers into the dealerships, profits have withered. Sales growth at Ford has averaged only 2% a year for the last five years (vs. 11% for the S&P 500) and earnings have been negative. Given these factors, is it any wonder that Ford's stock chart shows a steady decline?

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David Edwards is a portfolio manager and president of Heron Capital Management, a New York management firm. Edwards was a contributor to Harry Domash's Fire Your Stock Analyst: Analyzing Stocks On Your Own available at Amazon. At the time of publication, his firm was held positions in Cisco, JP Morgan, Citigroup, Fleet Boston, Fannie Mae, Vornado, Agree Realty, Wal-Mart, Target, Home Depot, ExxonMobil, Baxter, Quest Diagnostics, Pfizer, Merck, Amgen, Genzyme and Incyte Pharmaceuticals, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Edwards appreciates your feedback and invites you to send it to David Edwards.