Depending on your investing strategy, you might take (partial) profit off from a holding that has become excessively overvalued or choose to hold on to them as a part of your portfolio for safe income.
However, certainly, when stocks have become pricey as Realty Income (NYSE:O) and Welltower (NYSE:WELL) have, it doesn’t make sense to buy shares, as they’ll likely deliver lackluster returns in the near term. Instead, wait until their valuations have returned to more reasonable levels for a bigger margin of safety and a higher initial yield.
Investors often buy blue-chip REITs for their above-average and generally safe dividends. It’s difficult to say goodbye or even take partial profits from SWAN (sleep well at night) REITs when they have done well.
It’s wonderful if you bought them at a low price when they’re undervalued. But what do you do when they have run up and become excessively overvalued?
Reviewing history, the Big 5 Canadian banks actually don’t have a high short interest, except for CIBC. The Big 5 Canadian banks are some of the most profitable businesses on the Toronto Stock Exchange.
For long-term investors who are looking for stable dividends and stable growth, it does not make sense to sell your stakes in the banks, unless you have a huge allocation, own a large stake in CIBC, or are worried about the health of the housing market in Canada. You’ve got to hold the stock to get the dividends!
We believe there’s a higher probability of slower growth or stagnant growth in the housing market than a meltdown.
Should You Sell Your Big Canadian Bank Shares?
Should you sell your bank shares? The short answer is “no” unless you own CIBC stock and are worried about the health of the housing market. Royal Bank has the least short interest, which indicates investors are finding it to be the safest bank perhaps because the bank is the leader and largest among the Big 5 and also has a focus on high net worth clients.
Here’s a longer answer to the question. Ultimately, investors should answer these questions for themselves and then make a decision on whether to buy/hold/sell accordingly:
- Why did you buy the big banks in the first place? What’s your goal?
- What’s your allocation in the Canadian banks or each bank?
- What’s your investment horizon?
Here’s our answer with regards to our situation:
Consider investing in the best stocks from an industry you’re interested in, instead of buying more than two from the same industry, as there usually aren’t that many great investing ideas.
If you’re a low-risk, conservative investor, you should consider focusing your investing dollars on stocks that:
- have stable earnings or cash flow generation,
- have an investment-grade credit rating or stocks that have little to no debt and are not rated, like Facebook (FB),
- have weighted average interest rates of about 4% or lower,
- don’t dilute shareholders,
- have little short interests, and
- are trading reasonable valuations.
Stocks from the same industries are subject to the same operating environments/challenges and risks. So, it makes sense to compare stocks from the same industries. Additionally, you’d generally want to compare with peers of similar size (i.e., large cap to large cap and small cap to small cap).
In general, you don’t want to hold too many stocks in the same industry because such stocks tend to move in tandem, and you want to reduce risk through diversification. Besides, why not choose the best stock from an industry you’re interested in? The aim is to lower your risk for satisfactory returns.