Thoughts on Selling to Lock In Gains

[pepe]

(11-07-2013, 07:32 PM)KenBob Wrote: I only sell a stock which is overvalued compared to future value. My future value is based on 5 years of dividend growth. I use 5 years since a longer extrapolation would be unreasonable.

Would you please illustrate the above quote with an example?

[KenBob]

I value income stocks by comparing the dividend to the Bloomberg Investment Grade Corporate Bond Index yield. Adjustments are made for the differences between stocks and bonds, including inflation, debt, and taxes. By using the current dividend and a dividend extrapolated for dividend growth as limited by earnings growth, I get a current value (which I consider fair value) and a future value which includes growth (which I use for comparison between stocks).

My valuation technique was discussed in more detail on the forum here:
http://www.dividendgrowthforum.com/showt...php?tid=65

For KO the numbers come out as follows:
Price = $40.66
Current Value = $38
Future Value = $44

The current value used to be higher, but the inflation adjusted bond yield has gone up. Currently, my technique states that KO is overvalued, but a Hold. If the price increased above $44, KO would be a Trim, meaning I would sell enough shares to get the market value for my shares to the portfolio weighting for this company.

The reason I would only trim this stock is because KO is a quality company and I don't want to exit the position. On the other hand, I did sell off QCOR when it got above the future value. Since QCOR is a drug company with only one product, it is much more risky.