# Is it time to start trimming the Energy positions?



## Killer Z (Oct 25, 2013)

Selling/trimming your rising stars has to be one of the most difficult aspects of investing. My portfolio includes Energy sector positions that have done quite well in the past year such as: Canadian Natural Resources (CNQ), Crescent Point Energy (CPG), Whitecap Resources (WCP), Interpipeline (IPL), Baytex (BTE) and Suncor (SU). Because of their recent collective success, Energy now makes up over 35% of my portfolio. 

My current thoughts are that there is nothing wrong with taking profits ........regardless, would love to hear your collective thoughts?


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## james4beach (Nov 15, 2012)

Agreed that taking profits is the hard part.

One natural way to take profits is rebalancing your weightings. For instance if your overall portfolio is supposed to have 20% in energy and you find these stocks now make up 35%, then you should sell some at whatever time interval you normally rebalance. Maybe that means once or twice a year.

But putting on my speculative active trader hat (something I don't do much any more) it becomes more difficult... somewhat of an art. There's a few conflicting pressures

 Get it right and sit tight... you want to hold a position that's working well
 NEVER let a profitable position turn into a loss
 _Do_ take advantage of extreme market events

If I was speculating on energy stocks, here would be my approach. Since you got in before the huge run-up I would tend towards the "get it right and sit tight" mantra. This was Jesse Livermore's key insight... as a speculator, your job is to try a bunch of things in the hope that eventually you will be long the correct thing just as it explodes upwards. If you were long energy in 2013, you're in this camp -- *you got it right* -- and should mostly wait and see how it plays out. XEG is up 35% from a year ago and it's a beautiful chart. There is very little reason to exit your positions today.

But as an active trader, you should be nimble and keep on top of those other bullet points. If you saw your position(s) start to significantly go south, then absolutely close them to preserve profits. A position that is profitable (say you're up +35%) should never be allowed to become a negative loss. The approach that's worked best for me is to use a mental trailing stop, by which I mean that you don't actually enter a sell-on-stop order, but you keep watching the price action with a price in mind, which you keep updating, at which you would "sell and close the position".

As a practical example, XEG is now at $21. If I was long XEG from $15.50 last year, my mental stop would be around $18 today. This translates to: "I'm up 35% today, and I will preserve profits such that if I drop to 16% profit then I will take home profits and not risk getting anywhere close to negative". Then you keep watching and keep updating the targets. It's essential to have an exit plan like this, because every hot uptrend eventually ends and turns down.

The final bullet point is about extreme market events. What I'm talking about here are sudden sharp movements one way or the other. If you wake up one morning and your stock has gapped up 20%, then I would definitely take profits. This is because you may wait months or even years to accumulate say a 20% profit. Then one day you wake up and you're blessed with another 20% (it's like a year's worth of waiting). When that happens to me, I always take profits or even close and terminate the entire position. But this hasn't happened for the stocks you hold, keep watching in case it does.

All of this takes lots of time and effort, sound methodology, and routine. I haven't had time for it in the past several years so I stopped doing this kind of thing myself.


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## james4beach (Nov 15, 2012)

I'll give another real example from my active trading days and how I took profits. This was my proudest trading accomplishment, and I think I handled it like a pro: I was short the stock market in 2007, the S&P 500 and US financials.

By mid 2007 I could see that I was onto something in US financials. They kept falling, and my shorts were very profitable. I had "gotten it right" -- so I just held on (*sit tight*), even though profits were accumulating and it was tempting to take profits. The S&P 500 was sideways so I didn't have any particular profits there.

By early 2008 some banks had started collapsing so I really knew I had the right trade. I was "sitting tight" on US financials and the S&P 500. Both positions were cooperating and acting beautifully, there was no reason to cover my short and terminate. But in the back of mind is the question, what is the exit plan... when would I take profits and terminate my position?

In Sept/Oct, things started getting fun. The market started crashing, sharp movements down. By October 2008, I was looking at my portfolio and thinking... I've just added about 20% or 30% profit in a week or two. That's a lucky, and unexpectedly fast accumulation of profits. So I covered all of my short positions.

Into October 2008, I was out of the stock market. Yes I covered early, nowhere near the market bottom. But I still think I did the right thing: I held the position while it was profitable and then took advantage of a big market movement, a gift of quick profits, and used that to exit the whole thing.

... invert my example (short -> long) and the message is the same. If you're long something that's rising, you will never be able to sell at the peak. Impossible! The best you can achieve is to sell while it's high and take home profits. If you're lucky and something crazy happens, like an energy crisis, inflation crisis and the energy stocks suddenly double in price... then sell and exit your position, even though you won't be selling at the "top".


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## Cal (Jun 17, 2009)

In anticipation of rates moving higher, I have an eye out towards taking some profits on energy companies that may be affected.


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## doctrine (Sep 30, 2011)

In an RRSP/TFSA, perhaps, but in a non-registered account taxes would take a big bite out of 20-30% gains - I don't see the point there. All of those companies are raising dividends as well so the good times may be continuing, especially if oil stays at $105-115.


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## gibor365 (Apr 1, 2011)

35% it may be too high.... I hold SU, CNQ, BTE, CPG, EGL.UN, CVX, COP , but in total is about 20-25% of my portfolio, majority of those stocks increase dividends every year.... so I'm not selling...if I sell , I need to buy something (have already some cash available), but I don't see what I'm comfortable buy instead


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## Belguy (May 24, 2010)

A guest on BNN' s Moneytalk this week recommended that now might be the time to take profits on energy stocks.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I'll give another real example from my active trading days and how I took profits. This was my proudest trading accomplishment, and I think I handled it like a pro: I was short the stock market in 2007, the S&P 500 and US financials.
> 
> By mid 2007 I could see that I was onto something in US financials. They kept falling, and my shorts were very profitable. I had "gotten it right" -- so I just held on (*sit tight*), even though profits were accumulating and it was tempting to take profits. The S&P 500 was sideways so I didn't have any particular profits there.
> 
> ...



this is such a great fishing story
james, please keep em coming
how about that one, you advise all the rich old phart accounts each:


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## Eder (Feb 16, 2011)

I would pick your 3 that you consider the best businesses and sell the other 3...putting the proceeds into a sector that has under performed yet still pays dividends.


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## m3s (Apr 3, 2010)

CPG is hitting 7.5% of my portfolio so I have had my hand on the trigger to trim it back. The last time I trimmed a stock that grew that big in my portfolio was JNJ, and it has done nothing but grow since.

If you have a target allocation for energy, maybe look at what sector is beaten down right now? Rebalancing could mean adding new funds to those sectors while they're down. I noticed insurance companies seem to be lagging?


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## Synergy (Mar 18, 2013)

m3s said:


> CPG is hitting 7.5% of my portfolio so I have had my hand on the trigger to trim it back. The last time I trimmed a stock that grew that big in my portfolio was JNJ, and it has done nothing but grow since.
> 
> If you have a target allocation for energy, maybe look at what sector is beaten down right now? Rebalancing could mean adding new funds to those sectors while they're down. I noticed insurance companies seem to be lagging?


I'm getting a little overweight with some of my energy stocks as well. I've been tempted to take some profits over the last few weeks but considering I've already got a decent cash allocation and they all pay a good dividend, my plan is to add to a few of my underweight sectors. Financial and insurance companies are on my watch / buy list. The insurers should help provide a bit of a hedge to some of my interest sensitive holdings, in case rates start to climb sooner than later.


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## Islenska (May 4, 2011)

As the saying goes---never lose taking a profit

Energy stuff can be so volatile so I happily trimmed, of course it goes up later but this bull market has been a long time coming and don't want to jinx by hanging on too long.


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## My Own Advisor (Sep 24, 2012)

I'm with doctrine for the most part...it depends where these assets are. I keep most of my CDN stocks in a non-reg. account so I'm not willing to sell any winners. I let them ride. Dividend hikes will occur again and I don't want to miss them.


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## Synergy (Mar 18, 2013)

Islenska said:


> As the saying goes---never lose taking a profit


I'm not sure I completely agree with that old saying. You could end up paying taxes on the capital gain, missing out on further upside and spending more time to figure out where to allocate this new cash. If one decides on a new sector / stock who's to say that the new trade won't turn into a dog. If you keep the cash on the sidelines waiting for a correction who's to say when this will happen - 2 months, 6 months, 2 years, etc. There's risk either way. I realize that the energy sector can be pretty volitatile and the turmoil oversees may settle, but for long term holds I'm currently more comfortable buying more on dips and buying other sectors to rebalance. At least this seems to make sense for big name dividend payers.


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## Jon_Snow (May 20, 2009)

When my allocation of CPG is paying me a dividend of around 7.4%, or around 8k annually, I am in no hurry to sell it. I'm hoping the upper 40's and low 50's is its new range - if not I'll continue to happily collect the dividend.


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## My Own Advisor (Sep 24, 2012)

Sounds like a great gig if you can get it Jon  (re: $8k per year in CPG income)


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## Jon_Snow (May 20, 2009)

My Own Advisor said:


> Sounds like a great gig if you can get it Jon  (re: $8k per year in CPG income)


CPG, as far as I know, has never cut its dividend - not even in 2008-2009... Why would I bail now? Remember, I bought the majority of my 3000 shares at $35.


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## PatInTheHat (May 7, 2012)

I trimmed mine for the summer but they have just kept on running. Oops. Even after the massive gains most of the oil/gas stocks are still under valued and have plenty of room to potentially run.


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## My Own Advisor (Sep 24, 2012)

Jon_Snow said:


> CPG, as far as I know, has never cut its dividend - not even in 2008-2009... Why would I bail now? Remember, I bought the majority of my 3000 shares at $35.


I wouldn't get out either. I've learned buy and hold pays off.


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## Pluto (Sep 12, 2013)

http://business.financialpost.com/2014/06/26/5-signs-canadian-stocks-are-frothy/

Point five in that article speaks to energy stocks. 

If you don't know what to do, sell some, and keep some.


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## Killer Z (Oct 25, 2013)

james4beach said:


> Agreed that taking profits is the hard part.
> 
> One natural way to take profits is rebalancing your weightings. For instance if your overall portfolio is supposed to have 20% in energy and you find these stocks now make up 35%, then you should sell some at whatever time interval you normally rebalance. Maybe that means once or twice a year.
> 
> ...


Thank you for all the feedback, especially this one above from J4B.


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## avrex (Nov 14, 2010)

Are Canadian Oil Producers Still a Buy?

The author thinks that Suncor Energy (SU) and Canadian Natural Resources (CNQ) are still attractive, even with their amazing run up, in the last year.

I agree with the author. These are two of the best Canadian Energy stocks.


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## My Own Advisor (Sep 24, 2012)

Agreed although I only own one stock directly, the other indirectly via ETF.


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## MrMatt (Dec 21, 2011)

Think up an allocation you like, you can base it on whatever criteria you want.

If you're overweight you should consider trimming, if you're significantly overweight, trim now.

Don't waste your time trying to time the markets.
I know some very capable and intelligent investors who were "thinking" they should do something, but held on for various reasons.
One in particular was heading into retirement and wanted a bit more cash, they were thinking they should trim back. That was 2008, do you think they're happy with the hesitation?

Rebalancing or taking profits, or leaving a position you're not very happy with is almost never a very bad idea. 
In my opinion being successful investor/financial manager is more about not making mistakes, than making big wins.

I did trim some MU at $25 (for a 70% gain), and I don't feel to bad about it.


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## blin10 (Jun 27, 2011)

MrMatt said:


> I know some very capable and intelligent investors who were "thinking" they should do something, but held on for various reasons.
> One in particular was heading into retirement and wanted a bit more cash, they were thinking they should trim back. That was 2008, do you think they're happy with the hesitation?
> 
> Rebalancing or taking profits, or leaving a position you're not very happy with is almost never a very bad idea.
> ...


that's exactly what it is, even the top guys at major firms don't know what to do...


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## stevemac (Mar 1, 2011)

james4beach said:


> Agreed that taking profits is the hard part.
> 
> One natural way to take profits is rebalancing your weightings. For instance if your overall portfolio is supposed to have 20% in energy and you find these stocks now make up 35%, then you should sell some at whatever time interval you normally rebalance. Maybe that means once or twice a year.
> 
> ...


Great advice! I see most of my success and failures hinging on these points!!


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## My Own Advisor (Sep 24, 2012)

@MrMatt,

"That was 2008, do you think they're happy with the hesitation?"

That crash was a blessing for long-term investors.


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## MrMatt (Dec 21, 2011)

My Own Advisor said:


> @MrMatt,
> 
> "That was 2008, do you think they're happy with the hesitation?"
> 
> That crash was a blessing for long-term investors.


"One in particular was heading into retirement and wanted a bit more cash" his time horizon was getting shorter, and he knew he needed to adjust.
My point is he knew what he should do, and didn't do it.


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## newbi (Aug 19, 2009)

I have sold all my positions on ENB (65% gain) and half of my Baytex, and adding more to the insurance in PWF.


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## Jon_Snow (May 20, 2009)

newbi said:


> I have sold all my positions on ENB (65% gain) and half of my Baytex, and adding more to the insurance in PWF.


Baytex is going to the mid-50's range... just thought I'd let you know.


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## favelle75 (Feb 6, 2013)

My Whitecap, Surge, and Cequence are just starting to get going! No trimming here!

I did sell Torc though. 97% profit (bought before the reverse split).


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## Spidey (May 11, 2009)

I think it could be a decent time to start trimming - particularly if your portfolio is getting out of balance. I recently sold off half my position in CPG and just yesterday sold off my shares in COS @ $24.12


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## humble_pie (Jun 7, 2009)

hints of recent good-enough news coming out of china are going to save the bull & replenish the world economy imho ... energy stocks might droop seasonally during the summer months but i don't see why anyone would dump the ones that have good options markets & decent dividends.

what's so much better to buy if one dumps? please let's not hear how the insurance industry is so hot these days ...


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## Spidey (May 11, 2009)

humble_pie said:


> what's so much better to buy if one dumps? please let's not hear how the insurance industry is so hot these days ...


I have target allocations to Canadian equity, international equity (with a sub group in emerging markets), US equity, REITs and fixed income. I don't have specific targets for energy per se, but include energy as part of my Canadian equity allocation. What I buy in this type of market is usually pretty boring - the index that is most below my target range. I must admit that sometimes I am left seeing the recently sold security continuing to soar higher but usually I have enough related stocks to still participate in some of the gains and I take comfort in sticking to my strategy.


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## humble_pie (Jun 7, 2009)

Spidey said:


> I have target allocations ... I take comfort in sticking to my strategy.


agree, the best plan is the sensible plan where the investor feels most comfortable.

me i'm a diehard bottom-up picker. It sounds like heresy but i don't have formal allocations. I'd rather cut off my hand than sell a winning stock just because it had succeeded & i felt some strange uncontrollable urge to rebalance it coming on each:


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## dubmac (Jan 9, 2011)

I'll weather whatever happens - not selling. I have a lil put aside if things do drop. 
I recall several yrs ago when SU was 26 - and many of you said/screamed BUY - so I did - and SU has been a darlin.
If you have a G&M (July 19), turn to page B15 and read Scott Barlow's article "Time to take profits in energy stocks" - he uses a metric "price to cash flow" to determine future prospects. He says that when energy stocks hit 10X their cash flow, then they (historically) drop/correct thereafter. energy stocks are at 9.1X cash flow today.


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## lonewolf (Jun 12, 2012)

Killer Z said:


> Selling/trimming your rising stars has to be one of the most difficult aspects of investing. My portfolio includes Energy sector positions that have done quite well in the past year such as: Canadian Natural Resources (CNQ), Crescent Point Energy (CPG), Whitecap Resources (WCP), Interpipeline (IPL), Baytex (BTE) and Suncor (SU). Because of their recent collective success, Energy now makes up over 35% of my portfolio.
> 
> My current thoughts are that there is nothing wrong with taking profits ........regardless, would love to hear your collective thoughts?


 Your "Priests" have told you "BUY & HOLD" & ye shall enter the pearly gates
But I say unto you: You have been prepared for SACRIFICE so they can enter those gates.
Do you think the "POWER ELITE" will allow the boomers to muck up their heaven ?

Arch Crawford


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## gibor365 (Apr 1, 2011)

humble_pie said:


> hints of recent good-enough news coming out of china are going to save the bull & replenish the world economy imho ... energy stocks might droop seasonally during the summer months but i don't see why anyone would dump the ones that have good options markets & decent dividends.
> 
> what's so much better to buy if one dumps? please let's not hear how the insurance industry is so hot these days ...


I agree... currently there are not too many solid stocks that have reasonable valuation (P/E < 15 etc) and many of them in energy sector like CVX, COP, XOM, SU ... Why to sell them? I'd rater to buy more if they're oversold...
And if you sell. what are you going to do ? To sit on Cash? I remember 2 years ago there were similar talks when some anticipated big correction.....


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## Spidey (May 11, 2009)

I agree that there is probably more room for energy to run. It also can be a very volatile sector. I just remember a lot of Nortel investors who wished they had taken at least some profits.


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## Time4earlyretirement (Feb 21, 2014)

most of my energy plays, ie TOG, SGY, SDY, LRE, BKN, WCP... are more so for growth than sector allocation. Most of them pay decent and safe dividends and are valued at around 20-30 PE, which I think is fair.


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## gibor365 (Apr 1, 2011)

Spidey said:


> I agree that there is probably more room for energy to run. It also can be a very volatile sector. I just remember a lot of Nortel investors who wished they had taken at least some profits.


Don't think that you can compare Nortel to CVX or SU


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## Spidey (May 11, 2009)

gibor said:


> Don't think that you can compare Nortel to CVX or SU


I tend to agree with that but at the time Nortel was probably placed in the same camp as a BCE. However, the bigger point is over the years I've seen many people who wished they had sold perhaps half their shares after sizable profits; particularly holdings in more volatile sectors. But I'm at a more conservative part of my life right now. Younger investors, with the proper temperament for risk and in for the long haul, will probably not do too badly holding on to the above listed stocks.


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