In a recent article Bourse presented its top stock picks for 2012. Despite the limited upside projected for the local equity market, we outlined a few stocks with good valuations and the potential for price appreciation. In this week's article we would advise you on how you can add value to your portfolio by not just buying but by selling as well.

As investors, you should carefully monitor the stocks that you hold in your portfolio. On the local market, there are stocks that are relatively undervalued and may offer positive returns to its shareholders. At the same time, there also exist stocks that are expensive relative to the market and to its peers in the defined industry. Some of these stocks offer little or no incentive to investors, potentially bearing unrewarded risks and as such, we recommend that if you currently hold these, consideration should be given to rebalancing your portfolio.

This week we intend to outline some of these stocks. FirstCaribbean International Bank Limited (FCIB), Guardian Media Limited (GML), Capital and Credit Financial Group Limited (CCFG) and Readymix Limited (RML) have been identified using fundamental analysis as expensive stocks relative to not just the market but to stocks in the same industry.

FirstCaribbean International Bank Limited (FCIB)

Historically FCIB has traded at a premium to the market. Between 2002 and 2006, this Group traded at an average P/E ratio of 20.7 times versus the weighted average market P/E of 15.8 times. This premium disappeared for a few years but has since resurfaced. In 2011, the weighted average market P/E was 16.2 times while FCIB's P/E was 29.6 times (Exhibit 1). This stock was also expensive compared to the average P/E of the locally listed banks, which averaged 15.0 times in 2011.

In the last three years, the Group's earnings have deteriorated at an average annual rate of 20 per cent, whilst most of the other banks in this sector have registered double digit growth. FCIB's dividend yield for this same period averaged 4.3 per cent with an average dividend per share of US$0.055. Its current dividend per share stands at US$0.045.

Whereas the dividend story for this stock may have attracted investors, the question is would this hold going forward. It should be noted that FCIB's dividend payout averaged 56.5 per cent in FY 2009 and FY 2010, while in FY 2011 the payout was 97.8 per cent for a smaller absolute dividend payment.

Looking ahead, FCIB may struggle to grow its top line as it primarily operates within tourist based economies. Caution must be emphasised as the Group's efficiency ratio increased, moving from 49.8 per cent in FY 2007 to 66.7 per cent in FY 2011. Both these factors can erode FCIB's earnings. Such erosion may undermine the sustainability of its dividend payout.

At the current price of $9.10 there may be limited upside for this stock.

Guardian Media Limited (GML)

GML has and continues to trade at a premium to the market and its peers within the sector. Its five year P/E average is 19.4 times, while the weighted average market P/E stood at 12.2 times for the five year period. At the current price of $21.50, the stock is trading at a trailing P/E of 22.4 times

GML's earnings have declined in the last few years, with an average decline rate of 2 per cent. The Group's dividend per share was $0.50 in the last three years, with dividend yield averaging 2.3 per cent and a dividend payout ratio of 49.2 per cent. There are however alternative stocks with higher dividend yields (Exhibit 2) as well as price appreciation potential, bearing similar risks.

The average price over the last three years stands at $22.00. In 2010, there was no price movements and this was followed in 2011 with a stock price depreciation of 1.6 per cent. At the current prices the potential for price appreciation is limited for this stock.

Capital and Credit Financial Group Limited (CCFG)

This cross-listed Jamaican company traded at an average P/E ratio of over 15.0 times in the last five years. At the current price of $0.30, the Group is trading at a trailing P/E of 16.9 times, a premium to the market and the other Non- Banking Financial companies.

CCFG has not shown the resilience to the current downturn as demonstrated by some of its cross-listed peers. This is a critical attribute to be considered in light of uncertainties that surrounds the Jamaican market. It is also worth noting that CCFG cross-listed peers offer dividend, while CCFG has not paid a dividend since 2006.

Readymix Limited (RML)

RML has faced some hardships in the last few years. This was notable especially in its last few quarters where the company reported losses. In 2009, the Group's P/E ratio was 38.2 times, which was the highest of all the listed companies on the local stock exchange.

The company has reported declines in its earnings in the last three years with a loss being reported in FY 2010. Consequently, RML has failed to pay a dividend to its shareholders, with the last dividend payment being in 2008.

Since early 2009 the price of this stock has virtually remained unchanged at approximately $31.35. In this time frame, there was little trading activity for this stock so price movement would have been limited.

The inactivity in the construction sector will continue to manifest due to weak demand for cement and construction materials and this can continue to hamper the Group's earnings even for its peers. Cost containment strategies as difficult as it may be for the Group would be crucial going forward to attempt to assist RML bottom line. Its parent company has opted to increase the prices of its cement in light of continued escalating production and operational cost, this may be a possible strategy that the Group can also adopt. Investors are unlikely to be paid any dividends for this stock and the potential for any increase in price is unlikely.

We recognise that the illiquidity of these stocks may prevent price correction in the short term and prices may be maintained at their elevated levels.

However, as the most basic investment need of any investor is usually to beat inflation investors may have to pursue alternative investments in order to accomplish this goal.

Again, we reiterate that investors should seek to complement and diversify their portfolios with international equities and bonds and should seek the advice of their brokers, of which Bourse Securities is one.