A few weeks ago, I
wrote a column about my increasing caution toward equities. The spring rally, which I had
written about in March, significantly reduced the potential returns from stocks. I maintained that future rallies should be sold, as shares appeared much more fairly priced than they were at their October or March lows. Well, now I'm following my own advice and selling stocks.
I'm not positioned for a crushing short-term collapse. My selling is more the result of adherence to my investment discipline, which espouses purchasing cheap stocks after significant declines and selling them into strength at reasonable valuations. Prudence dictates some profit-taking, especially because I believe we're still in a secular bear market.
Off the Table
What did I sell? Many of the "tech specs" that I purchased last autumn have been revalued to much fairer levels. Through last Friday, most of the small-caps from my
speculation column have appreciated by triple digits. Although more upside exists in some of these ideas, others appear fully priced.
Names such as
have been eliminated from my portfolio.
Others such as
have been trimmed.
, I continue to hold. But, excluding
, few of them are cheap. Gundle is an exception because its price-to-earnings ratio is still low at 9, and the company is entertaining takeover offers.
I also have made some changes to the "controversial" large-cap value ideas in my portfolio. Essentially, I have downgraded all of them, some to holds and some to sells. I have taken profits in
. I'm still holding others, including
, because of their modest valuations.
What's Behind the Moves
The reasons for my lower equity exposure relate to valuations, sentiment and business fundamentals. At current price levels, the stock market trades for price-to-earnings and price-to-sales levels that appear fair to expensive on an absolute basis. Since the big rally, investors have become much more aggressive and bullish. Sentiment surveys and action in speculative stocks support this assertion. Finally, business fundamentals, especially corporate operating rates and unemployment claims/levels, are deteriorating. Current stock prices are discounting that ever-elusive second-half profit explosion. Things may get better, but I don't think they'll improve enough to support the big move in stock prices.
Some important differences do support higher equity prices. Lower interest rates and lower tax rates on dividends and capital gains represent important changes from my sell call of 2002. But I think these factors raise the trough level I expect from this secular bear market. They do not justify ever-higher prices for telecom, computer tech or biotech shares.
Over the past two years, I have repeatedly admonished both the perma-bull and perma-bear positions. The perma-bulls have been utterly crushed over the past three years and, more significantly, have destroyed their credibility with irresponsible "analysis." Resist the very recent claims for a new bull market, as the perma-bulls have done this since 1999.
The perma-bears present a more difficult case. They've been correct for much of the recent past. But they have also missed excellent opportunities in compellingly cheap long ideas because the market didn't suit them. Also, their volume level seems to peak at short-term bottoms, exactly the wrong time to capitulate. Resist their assertion that all stocks are not cheap until the
I reiterate my contention that successful investing in today's stock market requires flexibility, a value bias and a bold contrarian streak. Over the past 13 months, I've made three different bids to increase equity positions (February 2002, October 2002 and March 2003) and three different calls to reduce holdings (May 2002, January 2003 and June 2003). In general, these necessary asset-allocation changes proved effective in generating gains or avoiding losses.
Profits can be made from the long side by purchasing very cheap stocks off a highly populated new-low list. They must be realized when prices and sentiment reflect the buzz of a "new bull market."
For this reason, today I utter that four-letter word rarely heard on Wall Street: sell. But the bears should not get too comfortable. Before the end of 2003, I anticipate recommending my favorite three-letter word once again.
Robert Marcin is the principal of Marcin Asset Management, a private investment firm. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). At the time of publication, Marcin was long Epix, Artesyn, Verisign, Abiomed, MRV, Gundle, Tyco, Cendant and Cigna, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Marcin appreciates your feedback and invites you to send it to