One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful”. Or, in other words, sell when others are buying and buy when they’re selling.
But we might expect Foolish investors to know that, and looking at what Fools have been selling recently might well provide us with some ideas for investments that may be past their prime
So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been selling in the past week or so, and what might have made them decide to do so.
A tale of two banks
Two of the Big Four UK Banks featured in our latest “Top 10 Sells” list*, with Lloyds (LSE: LLOY) (NYSE: LYG.US) at number 4 and Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) at number 5.
Both banks required colossal bail-outs from the taxpayer, but Lloyds has been far more successful at returning to respectability, with the government having already disposed of some of its holdings, reducing the taxpayer’s stake from 39% to just under 25%. And, subject to regulatory approval, it may resume a dividend payment later this year or early next.
In contrast, RBS’s share price remains around 28% below the value at which taxpayers coughed-up £45bn to stave-off collapse, the bank is still 81% in public ownership, and there’s no prospect of a dividend anywhere in sight.
Just in case
On the face of it, it’s not clear what may have prompted some people to sell Lloyds. Analysts have estimated pre-tax profits at almost £6bn for this year, rising to £7.4bn next.
The first test of the accuracy of those estimates was in Lloyds’ half-year results, issued this week. Underlying pre-tax profit was up 32%, to £3.8bn, with the bank saying that is expects further improvement in performance in the second half. So the full-year total for this year may well be nearer to the one analysts are predicting for next year, or even higher.
On that basis, perhaps sales of Lloyds shares last week were more in the way of taking some profit ahead of the results — a “just in case” scenario, that hasn’t materialised — rather than selling down in the expectation of declining performance.
Take the money
The case for selling off RBS shares seems clearer, at least for those who sold at the end of the week.
The bank has been struggling to escape the long shadow of mis-selling litigation and regulatory censure, and even the welcome surprise of a shock profit announcement made on Friday — £2.6bn for the first half of this year, compared with a loss of over £8.2bn in 2013 — was sharply tempered by a warning from CEO Ross McEwan that the bank is still “actively managing down a slate of significant legacy issues“ including “significant conduct and litigation issues that will likely hit … profits going forward.”
And as the Scottish Independence Referendum draws closer — it’s now just 49 days away — there may be growing uncertainty about what effect a ‘Yes’ result might have on RBS.
So, despite there being other encouraging news, such as a notable £1.8bn fall in losses on bad debts and the success with which the bank has run-down its non-core assets via the creation of a £38bn capital resolution division (a.k.a. “bad bank”) last year, what amounted to a profit warning may have prompted some shareholders in RBS to take the money generated by Friday’s sharp rise — up to a 14% gain on the day — and run.
