By Robert Bacarella | July 10, 2018
One of the most difficult portfolio management decisions is when to sell a security. If a stock price is falling, first determine whether the decline is market-related or for a company-specific reason. For market-related declines, factor in price movement relative to the market and the company’s industry sector. A security should be sold automatically if the initial reason supporting a stock purchase did not work out or the company missed earnings expectations and lowered guidance. In either case, it is critical to limit losses and do it quickly. Cutting losses is the single most important investment decision you can make. It is a great mistake to think that what goes down must eventually come back.
But what about winners? These are more challenging sell decisions. Earlier in my career, I had a rule to sell a stock once it had gained 30% from my initial purchase price. That kind of guideline proved to be a mistake as many stocks were sold too early. By selling I gave up the potential opportunity for a “ten-bagger”—or other advances that could have made a good investment a great investment.
Generally, a stock should not be sold if it appears overvalued or reaches some arbitrary price target. Vital to investment success is to let profits run—but not melt away. Usually, to keep profits from melting away, one of the best reasons for selling a profitable holding is that the stock stops going up—or worse, starts going down. Variance in a stock’s relative performance suggests a change from an existing trend.
So let’s look at MasterCard, Inc. (MA)—a stock that has run up powerfully. If we toss out the idea of selling at some arbitrary price target, we need another way to determine whether it is, at its current valuation, a flower to cultivate or a weed to pull from a portfolio.
A key factor in determining if a stock is a flower or a weed is its stock price movement relative to the market. A stock’s strength relative to the market as a whole is the most basic measure of whether market participants—including all insiders and experts of various types—perceive a company to have an advantage. At its most basic level, relative strength suggests that someone, somewhere knows something promising about the company.
MasterCard’s relative strength to the market has been positive since April 2017. It has generally traded within a narrow price range and continues to demonstrate good relative strength.
MasterCard has performed extremely well for the past several years. On a valuation basis the stock may appear extended, but both fundamental research and stock price movement suggests continued solid growth from acquisitions and organic growth opportunities.
- Legal and litigation risk related to market dominance.
- Increased competition from Apple, Alphabet and Amazon.
- Banks demand a greater share of card network revenues.
- Disruptions from blockchain technology.
We believe MasterCard has one of the most innovative and competitively advanced payment systems. Core growth trends continue to improve across all segments, keeping the company in the “flower” category despite a valuation that appears extended. Based on average analyst price targets the stock has a worth of $208.26, which is 6.9% higher than today’s value of $194.80.
Bottom line: In our view, MasterCard is still a solid portfolio holding that should be cultivated and watered regularly.
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As of 6/30/2018, The Monetta Fund owned:
Amazon.com, Inc. 7.76%,
Alphabet, Inc. – CLC 4.72%,
Apple, Inc. 2.82%
MasterCard, Inc. –CLA 4.65%
As of 6/30/2018, The Monetta Core Growth Fund owned:
Amazon.com, Inc. 3.78%,
Alphabet, Inc. – CLC 2.89%,
Apple, Inc. 1.92%
MasterCard, Inc. –CLA 3.64%