When to sell a stock
Published:Wednesday | May 18, 2011 | 12:00 AM
This week, we focus on one of the most difficult decisions for an investor, that is, when to sell a stock.
The decision is often a difficult one because of the fact that if you sell a stock when it is down, you feel like you're giving up, while on the other hand, you find it difficult to sell a stock when its price is rising.
There is nothing wrong with holding a stock for 20 or more years, but there comes a time when it is the right time to sell a stock.
We can group the reasons for selling a stock into two categories: personal reasons and market-related reasons. This week, we highlight two market-related reasons that would be considered good-sell signals.
Sell Signal 1: Change in the company's fundamentals
As an investor, you bought the stock because of the company's fundamentals and its business plan.
However, over time, there might be changes such as top management quitting or being forced out, a new CEO taking the company in a direction that the investor believes is wrong, the pipeline of new products drying up or new products not receiving regulatory approval.
The central point is that when something changes, the investor has to re-examine whether or not it is the same company he or she bought. If its not the same company, then it might be time to sell.
Sell Signal 2: Persistentcash-flow problems
A careful analysis of the cash-flow statement gets to the guts of a business - the cash it receives and the cash it pays out. Some key questions are:
1. Is operating cash flow growing slower than net income?
2. Is inventory rising faster than sales?
3. Are receivables rising faster than sales?
These are early warning signs that it might be time to sell the company's stock.