A few weeks ago, I was discussing when it’s time to sell a losing stock. When you lose money, sooner or later, you will want to get rid of the stock. But when you are making money… when is the right time to pull the trigger? I have two situations to look at with you today:
Major Event and The Stock Soars – Should You Sell or Ride The Stock?
This is always a heartbreaking event. It’s heartbreaking because you need to make a decision fast between keeping a stock that shows a great profit and continue to ride it or cash in your profit and turn to another trade. First, you see a big jump in your portfolio all of a sudden. Then comes the heartbreaking decision: KEEP or SELL?
During the first quarter, some investors had this decision to make concerning Avon (AVP). At the beginning of the year,AVPreceived an offer from Coty. The stock surged by 15%. Some people probably sold and now laugh since Coty’s deal didn’t go through and the stock is now down 5% YTD. More recently, Heroux-Devtek (HRX – TSE) sold a division for $230M. This could lead to a special dividend of $7/share! The stock went up by 30% (between $11 and $12). Should you sell at $11 or keep the stock and hope for a $3-$4 special dividend per share?
In both situations, I would be tempted to sell and search for another stock to buy. I would do it without hesitation in the case of a merger & acquisition. However, in the HRX situation, this is a little bit more complicated. The stock is not “popular” and is probably not valued properly in the first place. The sale of a division creates a lot of liquidity that could be used for several projects (along with dividend distributions and share repurchases). Nonetheless, the market is so volatile that one should be selling upon good news. I’ve experienced the lesson once again when I didn’t sell VNP back in August 2011 (2-3 weeks after averaging up my position) when the stock soared to $9. For the record, the stock is now down to $2…. Yeah… I bet you can feel the pain.
More recently (last Thursday!), Seagate Technology soared by 14%. The reason behind this big jump? Its main competitor, Western Digital (WDC) shattered analyst estimates with booster numbers. The market anticipates that STX will most probably post similar results this Monday (by the time you read this, we will already know if this was right or not). The question is, then again, should I sell and make a total of 20% in less than a month?
A 20% investment return is very good, especially when you can do this in a month! But the stock is now up by 80% since the beginning of the year! And the stock still trades at a ridiculously low forward P/E ratio (under 6). Is the hard drive sector that dead? I don’t think so…
Steady Growth of Your Stock That is Now Showing a Double Digit Return
Some investors have their own rules to keep or sell a stock. If the stock is up by 15% for example, they pull the trigger without looking at the fundamentals. “The stock is hot; I’m making profit; why not cash it and look for another one”. It actually makes sense when you stop thinking right here. But if you continue to think about it: “What if you actually did a great job selecting stocks? What if your stock continues to grow for years and earn triple digit return?”. McDonald’s (MCD) investors who hold the stock for 10 years know what I’m talking about. This is solid return for a single “boring” stock.
I was looking at my latest dividend trades recently and have several double digit earners (total returns) as at July 26th:
CVX (+18.46%)
KO (+18.46%… not a typo, same return as CVX!)
INTC(+22.69%)
STX (20.68%)
T (Telus-TSE) (+15.05%)
All these stocks were bought in 2010 or 2011. Therefore, they all have made significant jumps in a short period of time. Should I sell them and start looking for other prey? What if these stocks are actually pretty good and continue to perform in the upcoming years? That’s quite a dilemma!
I read a paper on Telus recently. An analyst wrote that both Telus andBCEwere overvalued compared to its main competitors Rogers (RCI.B) & Shaw Communication (SJR.B). It is true that they are trading at a higher P/E ratio. In the mature market of telecommunications, it’s tempting to agree with the analyst that growth won’t be incredible in the upcoming years. On the other hand, Telus seems to be a fairly solid dividend payer with a strong potential to increase it. This is why I’ll probably keep the stock even if it’s not going to surge any time soon.
What To Do When You Make Money? No action is Worse than Action
For the past two years (since I bought this blog), I have concentrated on building a strong dividend portfolio. While my taste for risk encouraged me to pick VNP, this is my only non-dividend stock now. Once a portfolio is built, the next step is to determine a solid selling process.
In fact, before selling any stocks, the first thing I’ll do is to build a “stocks on my radar list”. This list will include all stocks that I’ll be following on the side. This will make any stock sale easier since I will already have prospect to replace it. At one point, if I see a stock that should perform better than one I have in my portfolio; I can switch them the same day. This is roughly what I did when I sold ZWB and bought STX at the same time.
The other tool I will use is a stop sell. You can place orders on your stock to sell them if they hit a specific price. For example, if STX falls below $26, it will automatically trigger the sale at the market price. The risk with that is to trigger a sale during a highly volatile day. The stock could hit $26 and then go back to $27 the same day. Chances are that you won’t have your position at the end of the day.
In all cases, not doing anything is definitely not a plan. When you buy a stock, you must know what you will do next. How about you? How do you handle your stocks when they are making a profit?
Disclaimer: I own shares of VNP, CVX, KO,INTC, STX, T (Telus)
Hi Mike;
There are always special situations where selling is not necessarily the best option.
As an example I purchased IPL.un @ $6.90 a “long” time ago. Do I really want to to sell it now when it is still yielding over 5% div per yr. (Almost 15% on COP)? It has actually paid itself back to me already over the years. Can I find anyhting that is better and/or more stable?
Rusell Metals (RUS) I caught it on the way up from 2009 so it is paying me over 8% on COP. Gyrates up and down but over all fairly stable. Would rather look to pick up more if would drop into the $20 range.
BCE (Yes I know you like Telus) Biggest holding with HELOC money poured in there. Still paying 5%. I actually started purchasing @ $29 several years ago.
I do sell at times for the gain but usually that is when a bottom had fallen out and it was “irresistible”. OH, what dangerous words.
I don’t have all winners but I like dividends. Indeed I have several “ouch” stocks still in the portfolio but, again, they are still paying me something to hold on hoping they are at the bottom already. If not, and they don’t rise. then I would dump them for hopefully greener fields.
I am trying to get around this problem by just buying stocks and not selling them. I am building my portfolio around dividend income, and because of this I buy stocks with the intention of holding them for life.
Of course I haven’t encountered a situation whee a stock of mine has climbed unbelievably so I can’t say I wouldn’t take some profit.
If I’m happy with, and purchased primarily for the dividend, I ignore price movements for the most part. Most important is making sure the dividend is safe and hopefully going up.
I bought some Sandvine (SVC) a while back, for under a buck. It was a bit of a gamble, so just dabbled. I sold enough at just over 2 to get back my original and let the rest ride. In hindsight I’d have been better off selling it all, but when I’ve got my capital back I worry less about price movement.
@Richard,
I know the feeling. Getting 8% dividend is very nice 🙂 But still, you should sell BCE 😉 hahaha!
@ Poor Student,
This is a good strategy but at one point, you might have to sell some stocks. Who knows, maybe that Coke won’t be popular in 15 years ???
You guys are just too smart for me. I am so glad I have someone handling my retirement instead of having to do it myself.
Hi Mike,
I don’t usually trade individual stocks. But one thing I learn is that most of the time (9 out of 10), you probably want to sell on news. For instance, my co-worker owns Monster Beverage Corp (MNST). One day, the news came out and said Coke is in talk with MNST to buy them out. The stock went up 20% or so. My co-worker was wondering what he should do. I told him that 1) even if Coke buys MNST, it won’t be that much better than now, 2) if it just happens to be a rumor, it will come back down hard. So, he sold all of his shares that day, then another news came out saying Coke never talked to MNST about the acquisition and he was able to buy back his positions plus extra $2-3,000 in his pocket. Just a thought.
by the way, did you sell??? 🙂
Hey John,
On a news like this (we have another great example with Avon at the beginning of the year), I think you are right. Sell, cash your profit and forget about the money you are leaving on the table (maybe!). However, when the stock surges upon financial results, it’s hard to sell. Because the company could continue to do well in the future too!
I didn’t Sell STX and I was a bit annoyed that it lost 9% during after market on Monday. Fortunately, the stock gained back everything on the market in the past two days. I’ll probably start looking to buy another stock. When I usually do such a quick profit (20% in 3 weeks), I’m always tempted to find another trade…
Interesting post! I’m looking to get into self-managed investing in the next few months, and this is something I have been thinking about. Lots to digest…