Price guides and model portfolios

After discussing our recommendations last week, today we look at price guides and how it all fits in with our portfolios.

To help provide context for our recommendations (see The meaning of Buy, Hold and Sell), in most cases we’ll put a price guide on a stock, to give an indication of where we’ll consider changing our recommendation. We'll sometimes leave out the price guide, though, where a stock’s value is particularly sensitive to an external factor, or where that value is especially hard to judge, or changing quickly.

An example of the former would be a commodity producer like Santos, whose value depends heavily on the price of the relevant commodity. So the company’s value may move up or down by tens of per cent – along with the share price – without anything happening within the company that’s worth us reporting on (we assume you don’t want us telling you every time the oil price moves by a few per cent). Of course in our reviews we’ll try to explain the sensitivity, and we’ll provide updates where the gap between price and value changes substantially.

An example of where we’ve dispensed with a price guide due to a company’s value being too hard to judge would be Sirtex Medical. At current prices we don’t think there’s enough margin of safety to warrant a Buy but, while everything goes well, its price is likely to keep marching upwards with earnings, which is to say relatively rapidly. Rather than chase it higher with our price guide, and risk it becoming quickly out of date, we prefer to express our thoughts about value in words rather than numbers and remind those holding the stock to take profits on the way up.

Even where we do provide a price guide, it’s important to note that things change with companies and markets – sometimes faster than our price guides can keep up. We do our best to keep them in line with our thinking, but nevertheless the recommendation is paramount, with the price guide merely playing a supporting role.

Portfolios

Our Growth and Equity Income portfolios were originally conceived as a means of demonstrating how you might use our recommendations to manage a portfolio, but they entered real life last July and began accepting money for investment (see here for how to invest). As a result they are no longer a demonstration, but they have perhaps become even more useful as real-life examples (and more useful still if you actually want to follow them by investing).

The difference is subtle, but it means for example that we won’t hesitate to buy or sell our Hold recommendations, if we think it will help meet the portfolios’ objectives (as we did recently by increasing our Equity Income Portfolio’s exposure to banks – see the comments to that article for a discussion of the subtleties involved). We won’t, however, buy our Sell recommendations or sell our Buys, except in limited circumstances to take profits (such as in the example we gave at the beginning).

Further explanations

All of that is how we try to do it but, as we’ve already noted today and in The meaning of Buy, Hold and Sell, we’re limited to some fairly blunt tools – and we don’t always swing them with 100% accuracy. Where there are obvious nuances, such as when we think you should manage your weighting to a stock in a certain way (perhaps by increasing your holding gradually as a price falls, or taking profits as a price rises), then we’ll try to explain this in our reviews, so pay special attention to the final few paragraphs where this sort of thing is typically covered.

And of course if you don’t understand our reasoning, then don’t hesitate to ask – either in the comments section of an article or via our Q&A forum.

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