Specific reasons to red flag a stock for potential sale

Welcome to earnings season, the time when, on a quarterly basis, publicly traded companies report how they performed over the past three months. Quite often, this is a perfect time to conduct a thorough analysis of your portfolio holdings. With this in mind, we thought it appropriate to apply some discipline to sales of stock, all the while keeping in mind that immediately after purchasing a stock, it is imperative to establish, monitor and, when appropriate, adjust upward ( but much less often downward) the price at which you are willing to sell. In addition to a change in the price per share, there are many reasons to jettison a holding, some of which are outlined below.

As witnessed this past quarter with regard to IBM, a revenue and/ or per share earnings report that fails to live up to Wall Street estimates for a given quarter or two is perhaps a reason to lighten up. Ours is an industry of expectations and should a company fail to live up to these expectations, chances are that for some time the stock will have difficulty making headway until it re-establishes credibility. We apply the cockroach theory inasmuch that where you find one cockroach, there are usually more. Specifically, quite often one bad quarter begets another. It is also important to keep an eye on how the stock responds to a poor earnings report. If the security moves up on relatively poor news it may be a sign that it has bottomed out. Another red flag is if there is a shakeup in upper management. Quite often, reorganizations precede bad news and such a shake-up could be a telltale sign that some bad news is coming. Perhaps the shakeup will be accompanied by a press release 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. The reddest of flags pertains to accounting issues, whether detailed or undefined. Should a company (see Enron and Worldcom, just to name two) 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.”

Put up your guard should a company make a change to its strategic direction. More often than not, when a company embarks in a new direction it is because the old direction was not working and that this new direction should be the panacea. However, this “new direction” is often laden with pot holes as the company finds its way. Better for an investor to step aside and wait for potential better point of entry than to continue on the same course. As investment advisors, most often when we consider selling it pertains to the issue of valuation. There are many metrics utilized to determine valuation which may include, the price of the security relative to its earnings (P/E Ratio); the P/E ratio relative to its projected rate of growth (P/E/G Ratio); the rate of revenue growth; the distance from the stock relative to its 10-, 50-, and 200day moving averages, and so on and so on. As an investor, it is your job to select a few of these metrics that fit your investment style and follow them religiously. Finally, as noted above, don’t randomly sell a security should one or more of these events occur. Rather, wait and see how the stock reacts to the announcement. As outlined above, the reaction of other investors to these issues should ultimately determine your course of action. Regardless, be disciplined in your approach to investing. Follow a set of principles. 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 advisor. 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 advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518279-1044.

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.