My broker calls and says, "We're encouraging our clients to take their gain and sell Cisco Systems (CSCO) - Get Cisco Systems, Inc. Report, because we see it as going down." I said I would think about it, because I believe Cisco is a great company, even though they are getting some competition. I told him I'm in for the long term (at least five more years). He said my gain could be used toward another stock that may be better for right now.
The same day I receive hotline news from the Michael Murphy Investor newsletter. He says Cisco is still a buy and not to listen to what is being said on Wall Street. His hotline news was encouraging, but I'm still worried. Who do I listen to? I don't want to sell, but I can't afford a loss. -- Marie Lekorenos
Let me start by saying that I am not going to compete with the rest of the pundits and give you a buy/sell recommendation. What I will do is help you make that decision for yourself. Before you decide, you have to do some serious research and ask yourself some tough questions about Cisco -- and how much you trust your broker.
Getting contradictory information is becoming the norm these days, thanks to our unprecedented volatile market.
And Cisco is a prime example. The uncertainty in this stock has been going on for a while now. A few months ago,
wrote a stinging article raising concerns about the company's
price-to-earnings multiple and ability to continue its acquisition pace. Two days later,
published a glowing piece singing the company's praises.
So whom do you believe? Well, both of them. The market is a barter system. For every buyer, there must be a corresponding seller. So buyers and sellers obviously have different assessments of a company, says Charles Kadlec, chief investment strategist at
and author of
Dow 100,000: Fact or Fiction
. It's up to you to decide which camp you fall into.
You need to analyze this conflicting information to find the position that best suits your investment policy and principles. But to best determine whether the information you're getting is logical and unbiased, you'll need to do some legwork.
Who's the Messenger?
"It's important to look at the sources of information you're getting," said Kenneth Janke, president and CEO of the
National Association of Investors
. So if you got your most recent tip from your 80-year-old uncle, research it before you react.
And while we'd all like to believe that brokers forever act in our best interest, unfortunately, that's not always true. Be skeptical when they call about a new hot stock, because they have a lot of incentive to make stocks sound better than they are.
Big brokerage houses make loads of money taking companies public. But to ensure even more work in the future, there is a big motivation for the brokerage house to give the stock a positive rating. The company then is happy with that rating and goes back to the firm when it needs, say, some help with mergers-and-acquisitions work.
Better still, brokers work on commission, and it's much easier for them to sell a stock with a positive rating rather than a neutral one. So again, your broker may call you about a "fabulous" stock that in reality might be mediocre at best. For more on understanding analysts' research, check out this
story from our Analyst Rankings package.
Also, know that sometimes brokers are limited to selling only the stocks on their firms' hot lists. If a new stock hits the list, the broker will be eager to sell it and make some commission.
The bottom line is to make sure you can trust your broker. If you find that you can't or that he has a much different vision of your portfolio than you do, you might be better off with a new broker. Find someone whose philosophies mesh with yours.
Has Anything Changed?
Don't be afraid to ask your broker why he thinks you should sell. Just because the stock has been going down lately may not be the best reason. Does he think it's going to continue to drop in the future? From your question, it seems he thinks you can put that money to work in another stock. Is that stock new to his hot list? If so, is he asking you to sell Cisco just to create extra cash so you can buy his new hot stock? That would be the wrong reason to sell Cisco.
Now ask yourself, why did I buy Cisco? Are those reasons still valid? Or has something fundamentally changed?
If you're going to own individual stocks, you need to return to the principles of investing "rather than the principles of speculation," Kadlec said. Learn how to read and understand a company's financials and fundamentals. Become an educated investor. Then you can make sound decisions and have intelligent conversations with your broker.
In Cisco's case, if your research proves that the market for its services is still favorable and that it still has strong growth potential, then hold it, said Kirk Kazanjian, director of investment advisory services at
Acumation, an online financial advisory service company. Ignore the noise from your brokers and relatives and stick to your original investment philosophy. The most enduring trait of a successful money manager is discipline and consistency. As an investor, it should be yours, too.
If, on the other hand, you find that earnings are starting to slide and the competition is taking over, then maybe your reasons for buying it have changed.
Where to Go for Info?
Educate yourself so you can question your adviser's motives. Don't take anything at face value.
But isn't this the reason you have a broker? So you don't have to do all this number crunching? No. Your adviser is there to help you make educated decisions. You have the final say. Would you walk in to a car showroom and trust the salesperson to sell you a car without having done some investigating of your own? So why is your portfolio any different?
For that reason, any time you can get your hands on independent research, your chances of getting more factual information are higher, said Janke, who suggests subscription-based services such as
Value Line and
Standard & Poor's. Both offer independent analyst reports and ranking on thousands of companies.
For some good freebies, check out
marketguide.com, for your number crunching. Input your stock's ticker and click on the "comparison" section to find out how your company's numbers stack up against its peers. Here you'll find that Cisco's five-year sales (revenue) growth rate is expected to be around 53%, while its peers are expected to grow 54%. Is that slight differential enough to dump it?
Meander over to
One-Click Scorecard. It includes a rating system based on three different investment strategies that will tell you, among other things, if the stock is in their buy zone. It also will estimate if your potential gain is at least three times your potential loss, and whether the stock price can double in the next five years. In this case, Cisco did not pass the test.
Then go to
Morningstar.com, enter the ticker and click on "Who's Buying" and "Who's Selling" to see what fund managers are doing. Note that while some of Morningstar's information is very current, the information provided by fund companies can get pretty stale.
In addition, pore over your company's recent earnings reports, (click
here for Cisco's) and read unbiased financial news, from sites such as
. Check out this
story on Cisco from columnist
As I said earlier, I can't make buy/sell recommendations, but you can. Too many individuals give themselves less credit than they deserve, Janke said. So trust your judgment.
At the end of the day, you have to sleep with your conscience, not your broker. So make decisions that allow you a good night's rest.
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