A Major League Lesson in Selling Losers

Should you do what the Jays just did and let your losing stocks walk?

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Major League Baseball is always swirling with rumors at this time of year. The annual hot stove tradition has players signing new contracts while others are being traded away. The near frenzied pace of the annual roster shuffle each winter keeps fans engaged until spring training finally arrives.

Getting burned by the hot stove

It seems like each year at least one team will make a move or two that has fans wondering if the management knows what it’s doing. A player the team was high on the previous winter is virtually given away the next. This year it’s my beloved Toronto Blue Jays that are making the curious moves.

About this time last winter, the team traded away a good chunk of its future in order to land Josh Johnson and others from the Miami Marlins. Johnson, at the time, was one of the most promising pitchers in the game. While he had past injury issues, when healthy he is a top-flight starting pitcher. Also last year, the club traded away a very promising young catcher in order to make it known that young incumbent catcher J.P. Arencibia was the team’s catcher of the future. Twelve months later both players were given their walking papers and the Jays received absolutely nothing in return.

Part of the reason both players weren’t retained is because the team’s owner Rogers Communications (TSX:RCI.B, NYSE: RCI) is trying to keep the club’s payroll from rising too high. Rogers made a big bet on the Blue Jays last winter that didn’t produce a winner on the field. While the Jays’ payroll is going up for the 2014 season, it still left the club with little wiggle room in order to upgrade its roster. Both players were deemed expendable after last year’s poor showing.

Letting go of losers

As investors we need to make similar choices with our limited portfolio dollars. There comes a time to sell, even at a loss, in order to add something that will add value to the portfolio over time. There are countless investors that, for example, still own a company like BlackBerry (TSX:BB, NASDAQ:BBRY).

Like a Josh Johnson or a J.P. Arencibia, BlackBerry is loaded with promise. The problem is that it just can’t deliver. Like Johnson it has a history of issues that has kept it from consistently delivering. Further, like Arencibia, the company’s all or nothing approach has backfired once again. Its latest mishap forced it to slash 40% of its payroll and write off nearly a billion dollars’ worth of inventory as its new touch-screen phones failed to deliver.

There comes a time when throwing in the towel on a losing investment is the only way an investor can truly move on. Now, I’m not specifically saying sell BlackBerry today, it’s more of an example. However, I’m sure that there is at least one investment that has failed to live up to its promise that really needs to be let go to free up cash that can be used to buy a more consistent winner.

One area the Jays are working to improve within their portfolio of players is adding players that can be counted on for the long haul. Right before sending Arencibia packing the club picked up a new catcher, for roughly the same cost, that should provide more consistent production in the year ahead. It’s looking to replace Johnson with a similarly priced, but more consistent starter. Simply swapping out a loser for a more consistent stock can go a long way to improving returns over the long-term.

Investor takeaway

There are a number of consistent Canadian companies that might fit the bill. Fellow Fool Robert Baillieul found a handful of Canadian bank stocks that have consistently rewarded their investors with dividends for over a century. Topping that list is Bank of Montreal, which has paid a dividend for 184 consecutive years and currently yields 4.03%. That steady production might not make up for the poor production of the past, but it will help to solidify the future. Another example is Rogers Communications itself. The media giant yields 3.75% and has steadily grown for years. Get rid of that dogged underperformer and rejuvenate your portfolio with a company that’s more consistent.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo owns shares of Rogers Communications.  The Motley Fool does not own shares in any of the companies mentioned.

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