Here's an invaluable lesson for under five bucks: The story of Jim Cramer's investment in Five Below (FIVE) and how it illustrates Rule No. 4 of his "5 Rules for Trimming Your Winning Stock Positions."
Cramer unveiled the five rules during an exclusive video-conference call with members of his Action Alerts PLUS club for investors, and said that FIVE perfectly elucidates Rule No. 4: "Even though a stock's long-term story is terrific, make sure that you take some profits when you begin to see warning signs of a noisy, short-term environment. Most likely, you'll end up with an opportunity to buy it back if the long-term story gets rocked by short-term factors."
The stockpicker's charitable trust owns FIVE, which sells products for $5 or less. But Cramer said the stock's recent moves mean it's a poster child for the value of making a disciplined trim.
"Here's a stock of a company we loved, but it rallied 21% in a straight line all the way to $122," he said. "We didn't think that it could continue at that pace."
So, Cramer's trust sold part of its stake to lock in gains while retaining other shares because he likes the company's long-term prospects. It turns out that was a smart move, as JPMorgan Chase retail analyst Matthew Boss downgraded the stock shortly thereafter and FIVE got pummeled.
"We correctly anticipated the downgrade, and yet still kept enough stock on to make a difference -- and it has since rallied well above where it was when we sold some," Cramer said.
This sell-some/keep-some strategy worked in part because Five Below has a good business model, he said. After all, if the Five Below concept works well in Philadelphia where the chain was founded, it might also work in Portland, Ore.; Beaumont, Texas or anywhere else, Cramer explained. "I think that Five Below can put up thousands more stores with its novelty treasure-hunt, knick-knacks and cheap toys," the expert said.
However, Cramer said he chose to sell some FIVE shares out of his charitable trust due to short-term concerns like possible U.S. tariffs on Chinese goods, which make up a lot of the chain's wares. "The lesson here is that FIVE was a recognition that even though this business has been terrific, we had no choice -- in an environment where tariffs could hurt [and] the consumer has grown fickle -- to take something off that you would not have normally wanted to."
By selling some shares of the stock that you love, you'll have room to buy more at a lower price "if a long-term story gets rocked by short-term factors," he said.
Check Out All of Cramer's '5 Rules for Trimming Your Winning Stock Positions'
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