If you are thinking about reviewing your investment portfolio, you should know what stocks you should consider selling. Many investors believe buying at the right price is important; yet, selling at the right price is also vital. Selling stocks which have appreciated in value, lock in your actual profits. There are a variety of reasons why you, as an investor, may want to sell a stock. However, before you decide to make changes in your investment portfolio, make sure you have a clear idea of which stocks you should sell and which ones you should keep. Some of the reasons to consider selling a stock include:
1. Business Model Changes
Many people decide to invest in stock based upon the attractiveness of the company’s business model. When there is material change to a company’s business model that makes the stock less attractive, based on your initial decision, it may be a good time to consider selling.
When a single stock appreciates and becomes a significant portion of an overall portfolio, investor’s should consider trimming a portion of the stock to help reduce single stock risk. When one stock comprises a large percentage of your portfolio, you face higher company specific risk.
3. Company Fundamentals
If a company's fundamentals, such as earnings, revenue, cash flow or profit margins show signs of deterioration, it may be time to sell shares. The qualities that once made the stock standout may be long gone. Always pay close attention to company fundamentals; the longer one waits to sell the more significant the losses may become.
4. Missing Expectations
When a company consistently falls short of expectations for earnings or revenue, it is generally a good time to consider liquidating your position. Regularly missing expectations is a red flag that the management is having difficulty operating the business.
5. Disruptive Innovations
Sometimes a competitor provides innovation that is disruptive to a specific industry. This could have a real impact on the value of stock an investor may own. There are some stark examples of this; for example, Netflix, with their unique business model, put Blockbuster and other movie rental companies out of business, Amazon's online book selling put other major book sellers out of business and Apple's smartphones have almost destroyed former industry leader Blackberry. As an investor, it is important to notice when an innovation begins to completely transform an entire industry.
6. Regulatory Problems
When a company is under investigation for serious violations, either by the Securities and Exchange Commission (SEC) or another regulatory agency, it is likely time to sell your shares. Make sure you take the time to learn the basis of the potential violations; not all investigations are going to end badly, but be prepared for the worst. Essentially, it is important to review news and quarterly reports for signs of trouble. Another indicator to look for with regards to regulatory issues are any updates to the “Risk Factors” in a company’s filings.
7. Unexpected Management Changes
The unexpected or unexplained resignation of key management figures could signal potentially significant internal problems within a company. Without a very convincing reason for the abrupt departure of C-Suite executives, one may consider liquidating your holdings.
8. Numerous Acquisitions
Most companies focus on one or several related businesses; for example, Dell Computers makes, markets and sells computers. Multiple acquisitions outside of a company's field of expertise could indicate problems in the core business. Companies that try to diversify away from their core business may be indicating competitive difficulties in their core business. These should be considered candidates for sale.
9. Cashing Out
The best reason to sell is because your investment has been successful, you are ready to cash out and fortunately, there are new and more attractive investment opportunities available.
Conventional wisdom dictates that holding onto investments over the long-term yields better returns. However, this does not mean that you should just invest and forget about the specific stock positions you have taken. If you’re investing in individual stocks, it is important to avoid emotion and stick to the facts. Knowing when to sell can be even more important than knowing when to buy.
Aash M. Shah, CFA is a senior portfolio manager at Summit Global Investments, an SEC registered investment adviser specializing in low volatility investment strategies. Learn more at www.summitglobalinvestments.com.
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