The meaning of Buy, Hold, Sell
Three simple words that don't always mean the same thing to everyone. Nor should they.
While most of the words we write are devoted to telling you what to do with your shares, we appreciate that you don't have time to read every one of them. So we provide a synopsis on the stocks we cover in the form of an overall recommendation, a price guide (usually), a maximum recommended portfolio weighting and a couple of risk ratings.
The trouble is that these are blunt tools, and yet they must convey our message to thousands of members, with different objectives, different tolerances for risk and who may have acted differently with respect to previous recommendations. A degree of interpretation is therefore necessary. The purpose of this article is to explain how you might go about it.
Imagine we've just upgraded a healthcare stock to Buy at $1, with a recommended maximum portfolio weighting of 5% and risk ratings of Medium-High. Two weeks later it announces success in a trial for a new form of vaccine and that US pharmaceutical giant Pfizer (NYSE:PFE) has taken a 20% stake at $1.50 and the stock quickly races to $2. Given the new information we still think it's attractive and retain our Buy recommendation. Indeed with doubts about the trial being removed, we nudge our risk ratings down to Medium and our maximum recommended portfolio weighting up to 6%.
How you might react depends on what you did with the original recommendation: if you passed on it, you might still think of buying, especially if you're more comfortable with the new risk ratings; if you ‘dipped your toe in the water' with a weighting of 2%, all things being equal it would now be 4% and you'd probably just hold; but if you'd started with 4% you'd now have a weighting of about 8% – well beyond our new recommended maximum of 6% – and you should consider selling a good chunk of your holding. So we have members that should be buying, holding and selling the same stock.
Sells and Avoids
With this in mind, let's run through our different recommendation categories, starting with the most straightforward: the Sells and Avoids. If we're saying ‘Sell' or ‘Avoid' a stock, then we don't think you should have it in your portfolio – but we will continue to cover it, because of its interest to members (perhaps due to a previous positive recommendation), or its relevance to an overall sector which offers other opportunities.
Generally, if we find it hard to point to a price at which we'd be happy to buy a stock – perhaps because there's a fundamental problem with its business (think Qantas (ASX:QAN)), or management, or it carries too much debt – then we'll make it an Avoid and dispense with a price guide. Where it's just a matter of price, then we'll typically make a stock a Sell and provide a price guide to show when we think our view might change.
Our Sell price on a stock will usually be pitched at (or more likely slightly before) the point where we think there is no value – which you'll also hear us describe as no ‘margin of safety'. As we creep below this point – and into our Hold range – then value starts to emerge, slowly at first, but increasing all the way to the point that we're happy to say ‘Buy'. It sounds simple enough, but it's in the Hold range that most of the confusion arises, because that's where our advice is most sensitive to your personal circumstances.
There are some quality businesses, for example, which we've recommended in the past and which are still worth holding, but which no longer offer enough margin of safety to warrant a Buy. Yet they keep performing well and their value – and share price – keep increasing. So we'll keep these stocks as Holds, but it will make sense for you to Sell chunks as your holding nears our recommended maximum weighting (or whatever weighting you feel comfortable with). Examples here would include the likes of CSL (ASX:CSL), Sirtex Medical (ASX:SRX) and Hansen Technologies (ASX:HSN).
On the other hand, there are stocks that we're not quite ready to make Buys across the board, but which are more attractive to some members because they meet particular objectives. If you're very conservative, for example, but still want long-term exposure to shares, then you might find it hard to build a portfolio just from our Buy recommendations, as the safest, steadiest stocks often just don't make it there – so it'll be worth looking at some of our preferred Holds (typically the ones closer to our Buy price).
If you're looking for a particular level of income (from shares), then again you might struggle to achieve a sufficient yield just from our Buy recommendations and it'll be worth looking at our preferred Holds.
We should add a proviso here, that it's dangerous to ignore value for the sake of chasing yield (or safety), but value is a continuum and Holds that are close to our Buy price might already offer the right attributes to attract some investors with particular objectives, even though we'd recommend that most people wait.
Finally, some people might just want some exposure to a particular sector for reasons of diversification – or you might be starting a portfolio afresh (or investing a new chunk of money) and don't want to wait (and hold cash) while the Buy recommendations come along. Here our recommendations and price guides can at least give an indication of our preferences: we think you'd be better off with a Hold that's close to our Buy price than one that's close to a Sell (or, of course, which has already become a Sell or an Avoid).
Buys and Spec Buys
Buy recommendations are more easily dealt with. Typically, we'll make a stock a Buy if we think it offers sufficient value (aka margin of safety), that most members, with typically balanced portfolios, should consider buying. We'll always provide a maximum recommended portfolio weighting, but it will generally be best to start well below this, to allow room for the stock to rise before you need to sell some, and to provide scope for a top-up if the price falls. In some cases we'll be particularly explicit about this, such as where a turnaround is underway but it's hard to know how long it will take.
Where the risks are particularly severe – and especially where they depend on external factors – yet we still see value in a stock, then we'll label it a Speculative Buy and give it a relatively low recommended maximum portfolio weighting – typically 2% or 3%.
Where things have moved so quickly that we no longer have confidence in our recommendation, then we'll sometimes place a stock Under Review, pending further research. We try to use this recommendation sparingly and will always aim to revert to one of the standard recommendations within a week.
Next week, we'll delve more into our price guides and how this fits in with our model portfolios before moving on to risk ratings and portfolio weightings.
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