Yesterday I advised raising some cash in the uncertainty of the fiscal cliff--here are some thoughts on sources of cash

12/27/2012 4:26 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Yesterday, December 26, I wrote that raising some cash in the uncertainty over the U.S. fiscal cliff made sense. The added cash would lower your exposure to stocks—in case Congress and the President fail to act and the markets took it badly. And the cash would give you some money to put to work if the markets did sell off.

This isn’t a call to sell everything or move to a defensive crouch. It’s preparation given our inability to predict which way the market will jump and a judgment on where the relative risk/reward ratio lies right now.

How to decide what to sell, though.

Here are some suggestions for thinking your way through the process. I’m going to use the stocks in my Jubak’s Picks portfolio http://jubakpicks.com/  for some concrete examples.

First, sell stocks to raise cash that are near your target price. I don’t think that holding on here for that last dollar makes any sense. (And in a market that’s either stuck in a rut or trending downward, I don’t think it’s likely that you’ll get that last dollar anyway.)  For example, two weeks ago I posted http://jubakpicks.com/2012/12/12/subdued-reaction-to-earnings-beat-from-costco/ that I thought I’d got most of the gains out of owning Costco Wholesale (COST) that I could expect for a while, especially after that $7 a share special dividend, but that I would hold on for a bit further into December since, on December 12, the market seemed to be trending upwards. Holding on here for an upward trend that seems to have vanished doesn’t make sense. A stock like this is a good source of cash right now and I’m selling it out of the Picks portfolio today.

Second, sell stocks to raise cash that have turned into short-term disappointments. If this market does bounce, stocks like these won’t lead the way upwards and in an unsettled market like this working through a short-term disappointment can turn into a six-month project. For example, on December 10 Dollar General (DG) reported earnings of 63 cents a share, 3 cents a share above the Wall Street consensus, but the stock get killed the next day on reduced guidance for the fourth quarter and worries about tighter margins. In the current market I can talk as long as I want about the 7.8% drop on the news as being excessive or how tough comparisons with the very strong quarter in 2011 distort short-term results or the likelihood that tighter margins are temporary and cite the company’s plans for cutting costs and I think I’d be wasting my breath. The fiscal cliff talk has taken a bite out of consumer confidence as Wall Street has expected and with the early holiday shopping numbers looking disappointing, suddenly everybody is worried about retail. I think this might be a great sector to own half way through 2013 and in that time frame I like this stock with its appeal to consumers trying to save a buck in a stumbling economy. But right now? I think this is a good source of cash. And I’ll be selling it out of the Picks portfolio.

Third, sell stocks to raise cash in sectors that are in Wall Street’s temporary doghouse. Retail seems to have been sent off for punishment recently. Even a darling like Michael Kors (KORS), which once could do no wrong, is now the subject of worried reports about discounting during the holiday shopping season. On such worries, the stock tumbled 6.6% on December 26 and is down another 2.16% today. Retail looks like a focus of worries about the effect of the fiscal cliff on the economy and my suspicion is that investors will wait for actual numbers to decide otherwise.

What wouldn’t I be selling to raise cash right now?

Extremely volatile stocks such as Apple (AAPL) that have already sold off significantly and have a history of big bounces in any rally. Stocks such as McDonald’s (MCD) where the turn in results—better sale store sales comparisons after the March quarter—are relatively close and the subject of substantial consensus among analysts. U.S. stocks with big exposure to China and other developing markets. The accelerating growth in these economies may not be enough to push these stocks higher against the tide of worry over the fiscal cliff, but once (if?) that fear recedes, these stocks will be present very attractive growth stories.

I know that the headlines about the fiscal cliff change by the minute and that it’s all too easy to feel whiplashed from one direction to the other. Try to find a moment of relative calm, however, to decide on a strategy and then stick to it, taking time only at the end of beginning of a day to see if you need to make changes. I think the odds are that, for investors, this “story” isn’t as important as the news flow makes it seem from hour to hour. You shouldn’t ignore it, but you should certainly try to make sure that panic doesn’t take over your decision-making either.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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