If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
It’s a Good Time to Take Some Profits
07/02/2007 12:00 am EST
Jack Adamo, editor of Jack Adamo’s Insiders Plus, says the market looks a bit shaky and it might be prudent for investors to trim their holdings in some winners.
[The] 185-point plunge [in the Dow Industrial Average on Friday June 22] on four billion shares of Big Board volume may be more than just a shot across the bow for the current rally. It may be a shot amid ships. We’re long overdue for a 10% correction (maybe more), and this may be the opening volley.
It’s a part of the natural tide of the market. As long as we’re holding good stocks, our discomfort should be short and very bearable while the excesses come back into line. You can take a little off the top of big gainers if you have a large enough position, particularly if they are in tax-deferred accounts.
Obvious candidates for a trim are Mosaic Company (NYSE: MOS), which is up 86% [so far this year], Dawson Geophysical (NASDAQ: DWSN), which is up 65%, and BHP Billiton Ltd. (NYSE: BHP) and Companhia Vale do Rio Doce (NYSE: RIO), both of which are up about 51%.
Incidentally, a mid-tier brokerage firm raised its price range on Mosaic to $45, but I still think the stock is vulnerable short term. (The company sells phosphate and animal-feed products. The stock closed at $39 Friday—Editor.)
If you don’t want to sell your excess shares [in Mosaic] outright, another way to lock in some downside protection is to write calls on them if the price is right. In the case of Mosaic, for example, at Friday’s close the September calls with a $35 strike price were fetching $5.50. That amounts to [around 10%] in down side protection before your investment would be worth a penny less than it is today.
Of course, in a big market swoon, there’s a chance the shares wouldn’t get called. That would actually be ideal. If they dropped to, say, $33 for a few months, you’d have the extra cash from the premiums in your account, and you’d still own this great stock for the long term. If you wanted some protection, but with more assurance your stock wouldn’t get called, you could write the August $40 strike.
One other stock you might consider trimming is ConocoPhillips (NYSE: COP). It hasn’t moved that much this year, but it’s facing a problem with Hugo Chavez in Venezuela. Conoco gets about 10% of its oil production from Venezuela, [so] the stock is a little vulnerable short term. So, skimming some of our 128% profit couldn’t hurt. [Yet in the long run], even if the company lost its entire investment in Venezuela, the stock would be a good buy. (ConocoPhillips and Exxon Mobil last week decided to leave Venezuela. COP’s shares closed at $78.50 Friday—Editor.)
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