Lately I've become increasingly wary of the risk of tough economic times hitting Australia in the future.
It's not that I think we're due for a recession or a massive market crash, but falling business investment, a slowdown in our biggest trade partner China, declines in the value of resources, super low interest rates, and a boom in property investing are making me a little nervous.
I think that these risks are cumulatively getting greater, and that prompted me to do a long-overdue clean out some of the dog stocks from my portfolio. I'd rather take the loss and the cash now, because with cash comes opportunity, and opportunity is priceless in the stock market.
Motley Fool trading rules prevent me from commenting on specific stocks I'm trading, but here are the sectors I've sold out of:
Speculative technology stocks
Despite being in the tech sector, without earnings this particular stock carries all the risks of biotechs, and while I still hold shares I am in the process of reducing my holdings further.
I can see the profits being put to good use at FlexiGroup Limited (ASX: FXL), a company best known for its FlexiRent and 'no-interest-ever' purchasing agreements. FlexiGroup has been relatively ignored by the market lately, and trades on a modest Price to Earnings (P/E) equation of around 13.
A recent acquisition in New Zealand has made Flexi the dominant player in that market, and management expects to gain significant advantage from its market leadership.
FlexiGroup is exposed to a retail downturn, but the length of its finance arrangements and the ability to supply business and government customers provides some degree of earnings certainty. With a 4.7%, fully-franked dividend and high-single digit growth forecast, I think FlexiGroup is a much better bet for the long term.
Miners
While I still hold three junior miners (gold and bauxite), I've completely sold out of my remaining iron ore exposure. I took solid profits in 2013 when prices boomed, and there was a compelling case for stronger prices as weaker miners failed, but a recent alliance between China and Brazil's Vale was the final straw for me.
Money here would be better spent at Woolworths Limited (ASX: WOW), the beaten-down grocer that I nevertheless picked as one of my top stocks to buy for a recession. I like its highly defensive income, the breadth of its presence, and the potential for growth through ventures into pharmacy, insurance or finance, and hardware.
It's true that hardware and groceries are holding Woolworths back, but I believe that management can turn it around in time, and confront the threat from Wesfarmers Ltd (ASX: WES), and Aldi.
A P/E of 14 is reasonable for such a quality stock, and the dividend of 4.9%, fully-franked, is the highest Woolworths has paid in nearly a decade.
Mining services companies
How did I get stuck with a mining services stock after all the articles warning investors off the sector? Price anchoring.
I've owned this stock pretty much since I started investing, and initially hoped its international businesses would be enough to turn it around when the Aussie Dollar weakened.… They weren't, so I'm selling it. Better late than never, right?
It might be an 80% loss, but the money's better spent at Collection House Limited (ASX: CLH) rather than grinding ever lower in the mining services industry.
Collection House is a debt collector that buys bad debts from the big banks and collects on them for a profit. It's grown earnings per share and dividends every year since 2008, and is on track for more double-digit profit growth this year.
The fantastic thing is, CLH is delivering double-digit profit growth, even though bad debts from the big banks are close to record lows. Theoretically when interest rates and bad debts rise, Collection House should make a killing. That's in addition to the profit growth and 3.8% fully-franked dividends I'll enjoy in the meantime, of course.
They say 'you never go broke taking a profit', but you never go broke cutting your losers either – especially not when they're dog stocks. Give me a few years and some quality businesses and I should be sitting pretty.
