Jim Cramer says you should always keep your ear to the ground for signs of trouble in a sector that you're invested in, as problems can first show up not in a stock that you own but in one of its competitors.
Or, as Rule No. 3 of Cramer's "5 Rules for Trimming Your Winning Stock Positions" puts it: "Feel free to do some light trimming when you spot a new worry of a sector -- especially if it hits a peer in the industry before it hits a stock you own, because it most certainly will impact your stock in the future."
Cramer unveiled his "5 Rules for Trimming Your Winning Stock Positions" during an exclusive video-conference call Thursday with members of his Action Alerts PLUS club for investors. He said that smart investors always sell some but not all shares of a winning position even if they still like the stock. That way, they lock in some profits in case the company's share price later goes back down.
Cramer recently followed Rule No. 3 with Amgen (AMGN - Get Report) , trimming his charitable trust's position in the pharma giant for a small gain after watching Wall Street punish rival Johnson & Johnson (JNJ - Get Report) over the issue of so-called "biosimilar" drugs. Those are pharmaceuticals that are chemically close enough to a drug company's patented medicines to provide serious competition.
"Back in January, Johnson & Johnson reported [and got] clocked for three bucks ... because the company reported that it would have increasing competition from biosimilars," Cramer said. "We said to ourselves: 'Who else has potential biosimilar competition? Why, Amgen does -- and it reports the next week.'"
So, Cramer's trust sold a chunk of its Amgen holdings and locked in some gains, a fortuitous move. When it was Amgen's turn to report its quarterly earnings, Wall Street also dogged the company over the biosimilars issue.
The stock has fallen from more than $200 a share in January to less than $170 today. "It has been punished severely, and I am glad that we took so much off in advance," Cramer told Action Alerts PLUS members.
Check Out All of Cramer's '5 Rules for Trimming Your Winning Stock Positions'
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