If you have stocks that have earnings stability and consistent earnings growth, higher margins compared to their peers, and price growth persistence, they’re probably winners.
If you’ve identified winners in your portfolio, hold on to them through thick and thin, and you’ll be immensely rewarded in the long haul. Oh, and, of course, add to them when they are attractively valued.
Earnings Stability & Growth
Aging and growing populations and advances in technology are reasons that the healthcare sector tends to experience stable growth. The juggernaut in the sector, of course, is no other than Johnson & Johnson (NYSE:JNJ), which has a piece of the pie in the different areas of Healthcare with a Pharmaceutical segment (about 41% of sales), Medical Devices segment (27%), and Consumer segment (14%).
J&J’s has experienced adjusted EPS growth every single year since 2000. It’s no wonder the company tends to trade at a premium P/E despite having been estimated to grow EPS by only about 6% per year over the next 3-5 years.
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: