After last week’s update to the portfolio – the one in which we added Teleflex (TFX) and subtracted Dynegy (DYN) – I received several questions about how I pick and choose which stocks stay and which ones get the boot. Here’s a little bit of the answer.

First and foremost, yes, I have an exit system just like I have an entry system. It’s not gospel, but it provides a reality check for me when other factors are not clear. Dynegy was a problem, mostly because the loss was big, but also because the chart was starting to break down. That still wasn’t the only reason though. No, DYN is also projected to do poorly as a company through 2010. And, the utility sector was starting to weaken (even more so than others) as well. All in all, it didn’t look good for Dynegy.

I decided to keep PAETEC Holdings (PAET) though. On the surface, PAET and DYN might look pretty similar. Digging deeper though, PAETEC shares had a combination of a better chart, and a better corporate outlook. That chart’s what I want to focus on here and now though.

As you can see below, PAET started to finds supprot near a major support level last week….. something DYN didn’t. (Both approached a similar support line, but only PAET hinted it could stop and reverse there.) In fact, PAETEC shares kissed that line Friday, and pushed off of it, closing higher on Monday. I think this is a solid sign of a recovery effort.

PAETEC Holdings (PAET) - 11/02/09

The jury’s still ultimately out on PAETEC Holdings, but I believe the odds favor hanging onto it more than dumping it.

Just so you know, this isn’t the only exit consideration I make before pulling a trigger, but it’s part of the process. As time rolls on, look for more of these concepts to come to light.

Bigger picture, this is one of those ideas where winning the short-term battle is crucial to winning the long-term war…. I may have saved an unprofitable exit that will eventually turn back into a profitable trade.