Another cool article from WSJ. Posting it in its entireity here as I dont know who all still have the subscription info.
It's Time to Take Stock of Your Stocks
By KAREN TALLEY and MOHAMMED HADI
DOW JONES NEWSWIRES
December 13, 2005; Page D2
For many investors, the end of the year is a good time to clean up their portfolios, re-evaluating stocks that haven't done well -- and deciding whether to pare back on winners that have outperformed the market and grown to more than 5% of holdings.
While the overall stock market hasn't moved much, there's been plenty going on among individual stocks.
Take Apple Computer Inc., up 133% as of yesterday's close. Or Google Inc., ahead 114%. Conversely, General Motors Corp. has lost 42% and Verizon Communications Inc. is off 24%.
Whether a stock has been a big gainer or a loser, Joseph Giordano, a financial adviser in Annapolis, Md., says investors should ask themselves a simple question: "Does the reason you originally bought the stock still exist?" If that reason is still there, and there are no big negative factors now affecting the company, "the stock should be held," he says. "If the answer is no ... the investment should be re-evaluated and probably sold."
Robert Zagunis, co-manager of Jensen Portfolio mutual fund in Portland, Ore., sold all of his Merck & Co. stock the very day last year that its blockbuster painkiller Vioxx was pulled off the market. He says the Vioxx problems threatened some of Jensen's fundamental assumptions about Merck.
Daniel Morgan, portfolio manager at Synovus Investment Advisors in St. Petersburg, Fla., sold 2005 laggard GM in January, when the stock was in the mid-$30s. He lost money but decided that selling was better than hanging on. The stock closed yesterday at $23.05. Mr. Morgan says his cue to sell came from factors that included shrinking market share and decelerating earnings at the auto maker.
The decision of whether to sell can be just as hard when a stock has soared as when one has tumbled. You don't want to sell a stock when it still has great prospects, but you have to be wary of keeping a stock just because of its past results.
Mr. Morgan is holding on to Apple even after its big advance. "They've had a great run based on the iPod," he says, "and recently announced a new product category, a video approach." He also is keeping WellPoint Inc., a health-care company whose stock is up 37% this year, even as it trades near its all-time high, where some investors typically take profits. WellPoint trades on the demand from corporate employers for benefits packages, he explains, and "if the economy is doing well, you have demand, like there is now."
Investors may want to trim, but not sell, some big winners. People "should look at the individual stocks that now exceed 5% of their portfolio and then pare back to a more suitable 2% to 3%," suggests Jim Oxley, a financial adviser at Raymond James & Associates in Indianapolis.
Another consideration for investors evaluating their 2005 winners and losers is taxes. If investors act by year end to sell stocks that have declined in value since being purchased, the losses can offset other taxable income and trim the taxes due in April on 2005 returns.
Mr. Oxley of Raymond James recommends "taking winners and using that stock for charitable giving, in place of cash." When you donate shares that have gone up in value since purchase, you avoid capital-gains tax on the increased value, and you can deduct the full value of the gift (as long as you itemize deductions).
Remember that selling a winning stock before you've held it for a year can be costly from a tax perspective. You pay tax at ordinary-income rates, which run as high as 35%, instead of the long-term capital-gains rate, which is a maximum of 15%.
Write to Karen Talley at email@example.com and Mohammed Hadi at firstname.lastname@example.org