HODSON ON FIVE REASONS TO SELL WITH CONVICTION.
One of t he hardest things for investors to do is to actually sell an investment. If a stock is up, they do not want to sell for fear of missing out on more gains. If a stock is down, then they do not want to sell for fear of missing a recovery, or fear of locking-in losses. Like all investing, though, it’s best just to take the emotion out of selling decisions. The market does not care if you are in a profit or loss position. A stock sold for $ 2 per share is still better than riding a loser down to $0.
Here then are five reasons you should consider letting an investment go:
MASSIVE INSIDER SELLING
Insiders often need to sell, be it to buy a house, fund a divorce, or just to practise prudent portfolio management. When looking at a stock with embedded gains, we like to look at the dollar value of insider holders, rather than actual share numbers. For example, an executive with a 10- per- cent position in a stock that has gone up 50 per cent in a year could still sell a number of shares and still have more dollars at risk than last year. This likely means they are being prudent. But when you see multiple insiders selling lots of shares, on a consistent basis, then something might be up. You need to look for a trend of ongoing, regular selling. It’s not foolproof, but if you have to sell one of two stocks, sell the one with insiders bailing out first — it might just save you some long-term grief.
PORTFOLIO MANAGEMENT REASONS
The easiest reason to sell is to rebalance your portfolio. If you have a stock that has done well, its weighting in your portfolio may have risen, say, from four to seven per cent. You now have a big bet on one company. For diversification, it might be a good idea to take the position down to five per cent, and use the proceeds on something else. This can be a reason to sell losing positions, as well. If a stock has done poorly, and it represents only 0.5 per cent of your portfolio, pull the weeds and sell it as a portfolio “clean- up”, to free up capital for something better.
RIDICULOUS VALUATIONS
This is a tough one, as we often propose that investors let their winners run. Good companies, in particular, are generally very expensive, and the really good companies never get cheap. But there are expensive valuations, and then there are ridiculous valuations. Ask yourself why a company is trading at 10, 15, or 20 times sales, like many in the junior biotech or marijuana sectors are right now. Ask yourself how close a company is to being profitable. Check out how much cash your company has. If a stock you own is 10 times sales, is years away from profit, and has little cash, what you really own is a lottery ticket. Like those, some will win, but most will lose very, very badly. Keep this in mind when considering your sell candidates.
‘ WEIRD’ CORPORATE STUFF
This of course will vary, and investors often need to read between the lines here. But if you recall the Sino-Forest saga, when short sellers questioned its timber rights ownership, the company stated it needed weeks to determine legal ownership. To us, this was a huge red flag ( you either own something or you don’t), and the stock could have been sold at $ 5 prior to its decline to $0. More recently, Valeant cut ties with Philidor RX, very quickly after short sellers brought it up as an issue and very soon after it even disclosed the business. It shut down a division it paid $ 100 million for less than a year earlier. This was a pretty strange corporate move, indeed. The stock was $148 at the time of this announcement; it is just $29 now. Less weird but still a sell signal was Dorel’s ( a furniture maker) acquisition of a bicycle company in 2004. Investors did not see the strong connection between children’s furniture and bikes. More than 12 years later, Dorel stock is still $ 5 per share below where it was when it bought Pacific Cycles for $300 million in early 2004.
TOO MUCH DEBT
We can rattle off a whole slew of companies whose large debt positions got them into trouble. Sherritt International, Baytex, Lightstream Resources, Valeant and Bombardier are all companies who have seen their share prices decline more than others because of investors’ concern over their respective debt levels. Debt itself is not always bad, but when investors are scared, or markets are weak, investors see high debt as a potential noose around a company’s neck. Keep an eye on the companies in your portfolio: if you need to sell something, we would target the debtladen companies first, just to stay conservative.
Remember, you are going to have losers in a portfolio. Keeping them too long and hoping for a recovery is not a good investment strategy.
WE LIKE TO LOOK AT THE DOLLAR VALUE OF INSIDE HOLDERS.