Sold RAI and OSG

Reynolds American (RAI), tobacco company best known for Camel cigarettes, had a terrible earnings report at the end of April. Cigarette volumes are down generally, and sales dwindled because consumers were trading down for cheaper brands. Smokeless tobacco (Conwood) did well, but not well enough to make me happy. As cigarette volumes are expected to continue to go down, and because consumers are buying cheaper cigarettes (or maybe they're just going over to Marlboro?), it doesn't look like Reynolds will be doing well in the near future. The dividend is great, but will it stay? I'm certain they won't raise it any time soon. I regret not selling when it was in the $70s. I sold my shares for around a 10% loss (it's actually less than that because of the dividends I've received).

Overseas Shipholding Group (OSG) also gave a crappy earnings report recently. While profits and revenues were up by very healthy amounts quarter over quarter, the company missed already lowered Wall Street estimates. The stock went up anyway, because a Jefferies analyst reiterated his buy rating, setting a price target of $125 a share. (Does Jefferies want to unload some shares or short them pretty soon?) This stock has been very volatile, and has seesawed between the $50s and $70s multiple times since last summer. Now that it's back in the $80s, I sold my shares for a gain of about 17%, excluding dividends. I think it's a great company with a bright future. They've been diversifying into the liquefied natural gas transport business, which I think will do very well in the future because of the growing demand for natural gas in places like the USA. There is usually a summer rally in oil transport stocks, but I don't want to see my gain diminished if that isn't true this year. I'm looking to buy the shares back later this year for a lower price.

In the meantime I'm going to use some of my sales proceeds to open a free business checking account at Sovereign Bank. They have an offer, expiring at the end of May, that's pretty sweet. Open a new free business checking account with a $500 deposit, and they give you a $150 bonus That's a 30% gain on no risk (since it's reported to the IRS as interest, your gain will be smaller if you have to pay taxes on it--however, it doesn't take long to open a bank account. Say it takes an hour, which is doubtful. $150 an hour is not bad). If you already have a business, I suggest you check this out. If you don't have a business, it's probably not worth it, as incorporation fees will probably be higher than the bonus.

When Should You Sell a Losing Stock?

I'm no expert or financial genius, but in considering whether to sell or keep the shares, I'd think about the following things:

1. Do you have solid reasons to think the company will turn around? E.g., is there new/better management in place now? Is there a new plan being implemented that you think will increase profits, etc? If the company is in a declining industry, what reasons are there for an industry turnaround?

2. What were your reasons for investing in the first place? If they were good reasons (gut feelings or someone else's recommendation don't count), are they still valid now?

3. Why would anyone else (a competitor, regular investors) buy the company now? Reasons for buying an unprofitable company could be that its assets (cash, equipment, building, etc) minus liabilities are worth a good deal more than its market capitalization. This is very rare.

4. What's going on with the loser's competitors? Are they experiencing similar problems (i.e., is it an industry wide problem?), or are their prospects much better (i.e., the loser just has terrible management/business plan/products)? If the latter is the case, I'd sell the loser and buy one of the competitors. You'll still be exposed to the same industry, but now you might have a deductible capital loss.

If your only reason for keeping the loser is the (gambler's) hope that the company's prospects will magically improve or it'll be bought out, you should sell the stock. It'll be the right decision even if for some strange reason it does get bought out or does improve. As long as you buy/sell stocks for rational reasons, I think you'll do fine in the long run.

Taking Lauren's comment (to my sold Dupont post) as an example, suppose your stock lost around 77% of its value, turning your $350 investment into $80. If your only reason for holding on is hope for a buyout or improvement, you should sell. For example, let's say it gets bought out. What would the premium be over the current market price? Let's say it's 100%, which I think most people would agree is far fetched. That would turn the value of your investment into $160. That's certainly better than $80, but you're still losing almost half your principal. Is it worth the risk to keep holding the stock because of the hope that your loses will be less, especially if the stock is being delisted? That $80 would probably be better invested somewhere else.