Timing & trends
There is an old adage in the investment industry that says it is easier to know when to buy a stock then it is when to sell a stock. From our experience this statement has genuine merit. The decision to sell is often a difficult one, particularly if the company has done well and the outlook remains positive. But as many investors can attest, holding a stock too long can not only erase your profit but can also result in an eventual net loss. Every stock is different and there is not precise tool for knowing when to sell. When we make the decision to hit the exit doors, on all or on a portion of a stock position, it is typically for one or more of the following four reasons.
1. Valuation Increase: We discussed the concept of valuation in an earlier chapter and have reiterated several times that value is the principle component in our investment methodology – we want to buy stocks at an attractive price. This same methodology is also applied to the sell side of the equation – we want to sell companies that have become overvalued. When we initially recommend a stock, we generally have a target valuation in mind that we would consider fair. We may recommend a company that is trading with share price of 8 times earnings and set a rough fair value target of 12 times earnings. If the share price appreciates beyond that target then it is time to consider selling at least a portion of the position.
2. Profit Realization: When we generate a significant return in a company it is often prudent to consider realizing some profit on the stock even if you think there is more room for price appreciation. Most stocks to not move up continuously in a straight line. If you are in a situation where you have doubled or tripled your initial investment then there is nothing wrong with taking some capital off the table, particularly if the valuation has become more expensive, growth has slowed, or the outlook has become less attractive or less certain.
3. Rebalancing the Portfolio: This reason is very similar to profit realization but with a different objective in mind. If in the previous example you double or triple your initial investment in an individual stock, that stock likely now accounts for a larger percentage of your portfolio. Your portfolio may then suffer from concentration risk by over-weighting to one company. By reducing your position in that one company (perhaps selling 1/3 or 1/2 of the position) you can both realize some profit on the investment and rebalance your portfolio while still maintaining good exposure to the company.
4. Deteriorating Fundamentals: In even the most stable economic environments the fundamentals or outlook for a company can change for the worse. Industries and economic backdrops change. Competition can heat up and margins can decline. Even a good company can make poor decisions and put themselves in a position of risk. When you purchase a company it should be because you like the fundamentals of the business. But if those fundamentals change that it may be necessary to reconsider your investment decision and sell the stock.
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Disclaimer | ©2014 KeyStone Financial Publishing Corp.
Regards,
Jenny McConnell,
Administrative Assistant/Office Manager
The stock market is about to enter what has historically been the weakest half of the year. Today’s chart illustrates that investing in the S&P 500 during the six months of November through and including April accounted for the vast majority of S&P 500 gains since 1950 (see blue line). While the May through October period has seen mild gains during major bull markets (i.e. 1950-56 & 1982-97), the overall subpar performance during the months of May through October is noteworthy. Hence the saying, ‘sell in May and walk away.’
Notes:
What should you invest in this time of year? Find out right now with the exclusive & Barron’s recommended charts of Chart of the Day Plus.
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As the recovery from the Great Recession stretches into its fifth year, the locus of economic momentum has shifted. In the early years of the recession, the cities that created the most jobs — sometimes the only ones — were either government- or military-dominated (Washington, D.C.; Kileen-Temple-Fort Hood, Texas), or were powered by the energy boom in Texas, Oklahoma and the northern Great Plains.
Now the recovery has shifted to a new group of cities that have benefited from the boom on Wall Street and the parallel IPO surge in Silicon Valley — call them asset inflation cities. Last year the S&P 500 clocked its biggest rise since 1997, helped by aggressive monetary easing by the Federal Reserve and a return to the stock market by investors who had retreated to the sidelines after the financial crisis. The high times have brought on a surge in IPOs: 2013 was the busiest year for public offerings in over a decade, and the pace has if anything quickened this year, with healthcare and technology offerings leading the way. M&A has also surged, with some very impressive valuations in the tech sector, such as Facebook’s $19 billion purchase of 50-person What’s App. The biggest beneficiaries employment-wise: the Bay Area, Silicon Valley and New York City….
Less than a month after the federal government began handing out licenses to producers of medical marijuana, there are early signs from some companies that business is growing faster than expected in the fledgling industry.
Smiths Falls, Ont., based Tweed Inc. announced last week it would not be registering new customers until it was sure it had sufficient supply to meet the demand.
The company also announced it was accelerating its expected production by the end of 2014 from 1.5 million grams to 6 million grams per year. The company said it had upgraded its forecast demand based on higher-than-expected registration and application information.
“We’re accelerating our construction program, bringing much of the construction we thought would be next year into this year,” said Tweed chair Bruce Linton….
Ian Morris is the author of “War! What is it Good For? Conflict and the Progress of Civilization from Primates to Robots.”
Norman Angell, the Paris editor of Britain’s Daily Mail, was a man who expected to be listened to. Yet even he was astonished by the success of his book “The Great Illusion,” in which he announced that war had put itself out of business. “The day for progress by force has passed,” he explained. From now on, “it will be progress by ideas or not at all.”
He wrote these words in 1910. One politician after another lined up to praise the book. Four years later, the same men started World War I. By 1918, they had killed 15 million people; by 1945, the death toll from two world wars had passed 100 million and a nuclear arms race had begun. In 1983, U.S. war games suggested that an all-out battle with the Soviet Union would kill a billion people — at the time, one human in five — in the first few weeks. And today, a century after the beginning of the Great War, civil war is raging in Syria, tanks are massing on Ukraine’s borders and a fight against terrorism seems to have no end.
So yes, war is hell — but have you considered the alternatives? When looking upon the long run of history….
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