MILLBURN, N.J. (Stockpickr) -- When I meet with clients, they share their current portfolios with me. This allows me to understand what their investment risk profiles look like. Invariably, I have to inform a client that some of the stocks in his or her portfolio will never come back. They are trapped longs.
I refer to them as "portfolio herpes." Sometimes these stocks will wake up and make a little run higher, but eventually they go back to a state of remission. There is no known cure for these stocks; they will infect your portfolio forever.
It is often difficult for me to convince a client to part ways with a stock that he has held on to for so long. Sometimes I am successful, but sometimes the emotional bond between client and stock is too strong.
How can you identify a trapped long that will never come back? For starters, let's look at the symptoms exhibited by these stocks. There are several characteristics that are common to stocks that are doomed to remain depressed in price. In other words, to borrow a phrase from comedian Jeff Foxworthy, you might have a trapped long if:
The stock continues to underperform the broad market average for a period of at least five years.
The stock pays a dividend that is above the market average or the board tries to prop up its stock price with massive stock repurchases.
The company has failed to remain competitive as its peers or up-and-coming companies capture market share or develop next-generation products.
There is a huge overhang in the stock. By that I mean that so many people are waiting for the stock to appreciate in order to recoup losses that any appreciable rise in the stock is met with heavy selling.
These stocks in many cases have been handed down from a prior generation. There is an emotional attachment to these stocks that can be hard to break. Many are held by investors of retirement age who bought them when times were better or different for these companies.
There are plenty of stocks that meet the criteria I've set forth. A stock does not have to meet all five of those conditions to qualify, but they will usually meet at least three or four.
Sometime selling a stock can be a cathartic experience that will liberate your mind and your portfolio from old investment demons. Furthermore, it can create liquidity and the chance to invest in a different stock that will provide you with opportunity for gains in the future.
Here are a
. If you own any of these stocks, you might want to consider biting the bullet now and selling out.
I am not a buyer of the big pharmas -- no way, no how. They have more trapped longs than any other group.
Johnson & Johnson
all suffer from the same deficiencies. These companies are losing valuable products to patent expiration while smaller or more fleet-of-foot biotech companies are developing new or more advanced drugs. News from these companies always sounds like another attempt to shore up a business that has a better past than future.
All of these stocks are dividend traps, offering above-market dividends and poor or negative growth. Unfortunately, many people made loads of money in the 1970s through the 1990s during the heyday of big-cap pharmaceuticals. Now it seems that they are happy collecting dividends while the stock prices erode.
If you want to stay in this sector, why not look at a more appealing company such as
, which I recently highlighted in my "
was a darling during the 1990s tech boom. Now it seems more like a refugee from the 1990s tech boom. CEO John Chambers, the Cisco Kid, was once one of the most-respected CEOs in Silicon Valley. In the last few years, Chambers has lost his luster as the networking giant is losing market share and technological advantage to competitors such as
According to my
colleague Gary Dvorchak:
"Ten years ago Cisco had 7.556 billion shares outstanding, but now the company has 5.587 billion. The $70 billion of buybacks at an average cost of $20 means that it bought 3.5 billion shares. Yet share count is reduced by only ~2 billion. Why the discrepancy? Over that same period, Cisco issued 1.5 billion of new shares, mostly in the form of options to employees. This is the worst kept secret within the tech sector -- most of these buybacks are presented as shareholder-friendly, yet they mostly offset the dilution of new option grants to employees. So the value actually accrues to the employees,
to the shareholders."
So what is Cisco doing now? It recently instituted a 6-cent quarterly dividend, which at current prices yields about 1.4%. Don't get sucked in by this dividend, and don't get sucked in by the Cisco Kid's banter. He has not delivered to shareholders in many years.
Not all the pros agree with me. For example,
increased its stake in Cisco by 0.6% in the most recently reported period, and
initiated a new 6.4 million-share position in the stock. Then again, it recently showed up on a list of
Bank of America
What do you do when you slap together trapped longs in
Bank of America
with trapped longs in Merrill Lynch and trapped longs in Countrywide Financial? You get one unholy alliance of trapped longs.
When you think of its core businesses, Bank of America would seem like a financial services company with a great future. Indeed, it might have one -- but that future is too far off. And I'm not sure that its future is as good as its past.
Bank of America has embarked on a program to separate the "good bank" from the "bad bank," which is a positive development. Management needs to do a better job at verbalizing and emphasizing the bifurcation to investors and analysts. The good news is that credit metrics are continuing to improve outside of the bad bank. The bad news is that many of the problems inherited from Countrywide continue to plague the company.
There is a huge overhang in the stock waiting to pounce on any opportunity to sell. Even worse is the fact that the company's request to boost its dividend was recently rejected by the
Bank of America investors include
. The stock shows up in a recent list of
as well as
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At the time of publication, Rothbort was short JNJ, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
, an educational social networking site; and, publisher of
. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
TheStreet.com's RealMoney Silver
website and has frequently appeared as a professional guest on
Fox Business Network
and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.