Four Good Reasons to Sell a Stock
Knowing the right time to sell a stock can be as difficult as determining when to buy. Even professional traders and money managers can struggle with this decision. It’s easy to make yourself believe that a stock that is down will come back and it can be just as tough to make a sell decision on a stock that is climbing. For many investors, the best approach is to operate within a set of rules that will enable you to make objective sell decisions based on both quantitative and qualitative factors. Please note that for this article, we’re only looking at the attributes of the stock to make a hold or sell decision. Personal factors (like needing the money) can also drive a decision to unload a stock.
Deteriorating Fundamentals: Among the factors an investor should monitor on an ongoing basis include earnings (Did they stop growing?), cash flow (Is operating cash flow growing more slowly than net income?), and liquidity (Do any of the liquidity ratios indicate the company will not be able to meet its short-term obligations?). Investors are also advised to watch for growing levels of inventories and rising receivables as additional signs of trouble.
You Missed Something in your Due Diligence: Perhaps you overestimated the capabilities of company management and their ability to exploit new growth opportunities. Or perhaps you underestimated the strength of the company’s competitors. Any of these realizations can make selling a better option than holding.
The Stock has become Overvalued: Soaring valuation ratios (like price/earnings) can provide an indication that investors’ expectations have become unrealistic. If the company’s fundamentals are not keeping pace with the stock price appreciation, it may be time to sell. The P/E ratio is best used in comparison with the company’s historical ratios, against its industry peers or against the overall market.
The Company’s Industry is in Trouble: Understanding the life cycle phase of the industry in which a company operates tends to serve stock investors well. Even a company with solid fundamentals can see a decline in its stock price as its industry matures and opportunity for growth becomes limited.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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