When hot stocks turn cold…

Bail out or hold on until they heat up again?

What happens when a stock you love no longer loves you back? Well, in Michael TX: Green’s case, you sell it. In Private Screening last February, Green, the chief investment officer of Evergreen Capital Management in Omaha, Nebraska, selected five stocks. Three of his hot picks have since crashed and burned: Green Tree Financial Corp. (NYSE: GNT), Tidewater Inc. (NYSE: TDW) and Deere & Co. (NYSE: DE). Only one, First Union Corp. (NYSE: FTU), continued to post strong gains, while Norfolk Southern Corp. (NYSE: NSC) had moderate losses.

Green liquidated his positions in New Orleans-based Tidewater and Deere & Co. of Moline, Illinois, back in June, when the stocks were still trading at a high. Green’s portfolio profited from the sell-off. But individual investors who held onto those stocks all year lost money.

Shares of Tidewater, an equipment supplier to oil and energy companies, suffered when oil prices fell. By December, it had fallen more than 68% off its 52-week high. When the U.S. farm economy softened, shares of Deere & Co., a distributor of agricultural equipment, fell off a high of $62 at the end of March to $34 at the beginning of December. Tidewater and Deere & Co. are prime cases that in falling markets, stocks with price-to-earnings ratios that have soared are likely to come tumbling down if earnings are at all disappointing.

“Once we invest in a stock we continuously monitor business and market conditions, and if we see the fundamentals of that company deteriorating instead of improving, we won’t hesitate to take profits or sell the stock,” explains Green.

Last June, Green Tree Financial, the St. Paul, Minnesota, home lender, was acquired by Carmel, Indiana-based Conseco Inc. (NYSE: CNC), an insurer and financial services firm. Green Tree investors, who of course are now Conseco shareholders, saw GNT shares surge 38% the day the deal was announced. By early December Conseco shares had fallen 43%, off a 52-week high of $58.13, as the company tried to absorb Green Tree’s delinquent mortgage loan portfolio and because of a low interest rate environment.

As of December, shares in Norfolk Southern of Norfolk, Virginia, one of the largest railroads in the country, were $30.94-about $11 off its 52-week high.

Shares of the largest regional bank in Charlotte, North Carolina, First Union, held strong during the market’s downside volatility last year because it had no exposure to hedge funds or tumultuous foreign markets. First Union earns almost 50% of its revenues from fee income, a more stable earnings stream than loans or noninterest income, says Green. After hitting a 52-week low of $41 in October, the stock rebounded to $63.06 by December.

Company (Exchange: Symbol)

Current

Price*

Price at
Recommendation

Total
Return

Current Value
of $1,000
Investment

Est. 5-Year
Annual EPS Growth

First Union Corp. (NYSE: FTU))

$63.06

$48.75

$29.35

$1,293.5

12.1%

Tidewater Inc. (NYSE: TDW)

22.00

56.06

-60.76

392.4

12.6

Deere & Co. (NYSE: DE)

34.00

54.81

-37.97

620.3

9.6

Norfolk Southern (NYSE: NSC)

30.94

31.81

-2.73

972.7

11.1

Portfolio Average

-0.1803

3,278.9

* As of

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