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6 reasons to sell a stock

Morningstar staff  |  11 Apr 2014Text size  Decrease  Increase  |  

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The following article is part of an ongoing educational series. The previous article can be found here.


While a company's stock price will obviously influence your decision on whether or not to sell a stock, don't let it dominate your thinking to the exclusion of all else.

The secret to knowing when to sell a long-term holding lies in doing your homework, even before you buy the stock in the first place. If you conduct your analysis thoroughly and follow the company closely, the decision to sell becomes a lot easier.

Everyone buys a stock having certain expectations of it: earnings growth, revenue growth, expansion plans. New store formats, perhaps cost-cutting efficiencies, and so on.

If the things you expected when you bought have failed to materialise, it's a warning that you should consider selling. If they fail to materialise to the extent that you had anticipated, that's another warning.

However, while past performance will naturally enter your decision, the difference between holding and selling rests on your expectations of the future as the "four common portfolio mistakes" clearly demonstrated.

Often, it won't be one thing that forces you to sell but a series of smaller disappointments. Any number of individual cues may finally break the camel's back and we have mentioned quite a few of these throughout the course.

Some possible "sell signals" include:

1. A lack of direction or significant changes in senior management;

2. Earnings per share growth slowing with no new earnings streams - such as new products or services - in the pipeline;

3. A stock reaching a cyclical high - for example, there being "too many cranes in the sky" for building stocks;

4. A gearing ratio creeping higher as a company tries to fund uncertain growth in earnings per share with debt;

5. A company or a significant segment of it being susceptible to a major change in government regulation, tax legislation, social demographics or the economic cycle;

6. Any other factors investors can identify, such as significantly increased competition that clouds the medium to long-term outlook.