Prior to purchasing a stock it is imperative to establish, monitor and adjust the price at which you are willing to subsequently sell. This disciplined approach helps you maintain perspective and respond to what will most likely be a volatile balance of calendar year 2017. Here’s are some key events that will tell you that it may be time to put your strategy into action and seriously considering selling a stock:
The revenue and per share earnings of the company fail to live up to Wall Street estimates for a given quarter. The business of the Markets is one of expectations. When a company fails to live up to expectations, chances are the stock will have a difficult time making headway until it re-establishes its credibility. We apply the cockroach theory inasmuch as where you find one cockroach, there are usually many more. Furthermore, quite often, one bad quarter begets another. Despite the above, what would cause us to hold onto a stock is if the stock price responds positively despite the bad quarter. This is typically a sign that the stock has bottomed out.
There is a shake-up in upper management. Reorganizations quite often precede bad news and such a shake-up could be a telltale sign that some bad news is coming. The accompanying press release usually states that “so-and-so is retiring to ‘spend more time with his/her family.’” Once again, watch how the price of the stock reacts to the news of a change in management. Be observant. Quite often this could be a time to buy.
Undefined or defined accounting issues are exposed. This is the reddest of red flags. Should a company (see Enron, Worldcom or Tyco) announce that they are conducting an internal investigation or, more worrisome, that the Securities and Exchange Commission is conducting either an informal or formal investigation into the accounting practices of the company, run for the door. Remember, when you sell a stock, you are not saying no to the investment forever, but rather “this doesn’t make sense right now.”
The company is changing its strategic direction. Quite often, when a company embarks in a new direction, it is because the old direction was not working. The plan is for this new direction to be the panacea. However, new directions are often laden with potholes as the company attempts to find its way. Better for an investor to step aside, take a wait and see approach rather than to continue on the same course.
Don’t just blindly sell a security should one of these events occur. Rather, take some time and see how the stock reacts to the announcement. Quite often the reaction by other investors to these issues should ultimately help determine your course of action. Should the stock rise, watch closely, but wait to sell. Should the stock fall, perhaps you should also exit. Either way, be disciplined in your approach to investing. Emotional decisions usually prove wrong.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial adviser. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial adviser prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.