Why I Sold Lockheed Martin

I loved to make up stories when I was a kid. I'd see a disheveled matron waiting for a bus, and I would fabricate the tale of her tragic life. A teen glaring over the handlebars of his bike became a desperado. A gorgeous vista was transformed into the opening scene of a mystery.

Ironically, my vivid imagination came in handy when I started reporting on finance. Though reporters often seemed to focus on the numbers, I would start with the plotline. As I saw it, the numbers were the result of the story, not the story itself. The story was always about people, and I wanted to know those people and what made them tick. The more I found out, the better I understood what was going on and the better I could predict what might happen next — both in the drama and in the numbers.

When I buy stocks, I do much the same thing. Every stock has a story — and maybe a subplot or two. When I buy, I have a script in my head that describes how the story should play out. By the same token, when I review my holdings to decide whether to sell, hold or buy more, I riffle through the pages and try to determine what chapter we're on. Has the story run its course — or gone off course? What should I do if it has?

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Triumphant saga. Case in point: I sold Lockheed Martin (symbol LMT) from my “Practical Investing” portfolio on January 23 because the plotline around which I had built my case for the stock had run its course. I had invested in late 2011, when there was so much hand-wringing about future cuts in military spending that shares of Lockheed (the lead contractor on the F-35 fighter jet) were selling for less than 10 times earnings and yielding 5.4%. Investors, I figured, would eventually come to their senses and realize they had been too harsh. Until they did, I would collect and reinvest those generous dividends. By the time I sold all but one share, Lockheed had handed me a total return of 30%. (I'm keeping one share of each stock I sell to make it easier to track how a former holding fares in the future. True, I could have just plugged Lockheed into my favorite stock tracker, but keeping a share will make it easier for me to judge the wisdom, or lack thereof, of my decision to sell.)

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I also sold my holding in PPL Corp. (PPL), a utility I bought in late 2011, when I was feeling glum about the economy. But now I feel more confident about the economy, so I'm looking for stocks that will do more than merely tread water. My profit on PPL was 5%, entirely from dividends.

Whither Apple? What about the recent plot twist at Apple (AAPL)? Continuing a drop that began in September, the stock cratered after Apple released results for the October–December quarter. Although sales were up, earnings were essentially flat, suggesting that Apple's profit margins are shrinking.

Investors seem to think that without Steve Jobs, Apple is just another phone maker. But I see their bearishness as a tragic misunderstanding, kind of like the missed rendezvous in An Affair to Remember. My reasoning involves what I know about the people behind Apple's numbers. Jobs, a genius at making products intuitive and easy to use, was famous for surrounding himself with brilliant people. His successor, Tim Cook, joined Apple shortly after Jobs returned to the company in 1997. Cook rose through the ranks, becoming chief operating officer in 2005. He was named CEO in 2011.

At the time of Cook's promotion, Apple's board gave him rights to one million Apple shares. But it attached a string. He gets half of the shares only if he lasts as CEO for five years; he'll get the rest if he remains at the helm for ten years. Will Cook be able to keep his job — and the rights to the stock — if Apple turns rotten? Not if Apple's board is doing its job. That gives Cook a powerful incentive to write a happy ending.

Kathy Kristof is a contributing editor to Kiplinger's Personal Finance and author of the book Investing 101. You can see her portfolio at kiplinger.com/links/practicalportfolio.