When Should You Sell Your Stock Positions?
Use logic, not emotion, when deciding to sell your long term stock positions. Here are some signs that may indicate its time to sell.
It's easy to let your emotions get the best of you. "What if the market continues to tank?!" or "What if I lose all my profits?!" are common questions that run through your head during turbulent conditions. Keep in mind you've done your research (hopefully) before buying, and thus you know that the company is set up for success and can weather the storm.
In most cases, it's best to let your shares sit and ride the wave because, eventually, things will calm down, and the tides will change. And if you've done your due diligence before investing in the first place, current conditions may even present growth opportunities for the company or buying opportunities to add to your positions.
Nevertheless, there certainly are instances that are cause for concern, indicating it may be a red flag to investigate whether it's time to sell your shares or not. These indicators are not determining factors and should not be used alone. Instead, using these indicators together as a guide to making hard decisions will simplify your decision-making process.
Indicators To Consider Selling Your Stock
Deciding when to sell a stock can be tricky. However, several fundamental indicators can provide insight. Here are a few:
1. Earnings and Revenue Growth:
When a company continually fails to meet analysts' earnings and revenue expectations, shows decreasing profit margins, has increasingly high levels of debt, or shows a decreasing trend in earnings and revenue growth, it might be a warning sign. Here's why:
Decreasing Earnings: Earnings, or net income, represents a company's profit. If a company's earnings are consistently decreasing, it suggests its profitability is declining. This can be due to a variety of reasons, such as increasing costs, falling sales, poor management, or stronger competition. Consistently decreasing earnings can also lead to a reduced ability to reinvest in the business or pay dividends, which can subsequently cause the stock price to fall.
Decreasing Revenue: Revenue represents the total amount of money a company brings in from its business activities before expenses are deducted. If revenue declines, it suggests that the company is selling fewer products or services. This can be due to various reasons like changes in market conditions, loss of market share, or issues with the company's products or services. Declining revenue is a clear sign of a shrinking business, and it's typically only a matter of time before it also starts to impact earnings.
Profit Margin Decline: Profit margins are crucial for any business. If a company's profit margins are declining, it might suggest problems with cost control, pricing, or other issues.
High Debt Levels: If a company's debt level is increasing and it doesn't seem to have a plan to reduce it, it could face solvency issues. Be sure to compare the company's debt level with those of other companies in the same industry.
A single quarter of poor financials isn't necessarily a signal to sell. Companies can have off quarters due to one-time charges or temporary market conditions. Some companies can have off years. However, if it's a continuing trend that doesn't seem to have a solution, it may be a red flag.
Also, make sure to compare the company's performance with its competitors. If the company's earnings and revenue are declining, but its competitors' aren't, it might suggest company-specific issues rather than industry-wide or economic problems.
2. Changes in company leadership or strategy
Changes in a company's leadership or strategy can profoundly impact the company's future, and by extension, the value of its stock. Here's how:
Leadership Changes: A company's CEO and other top executives play a pivotal role in setting its strategic direction, operational efficiency, and corporate culture. If key leaders depart, especially unexpectedly, it can create uncertainty about the company's future. New leadership might bring new strategies, which may or may not prove successful. Additionally, the new leaders may lack the experience or skills of their predecessors or simply fail to inspire confidence among employees, investors, or the market at large.
Strategy Shifts: A change in business strategy can be just as impactful as a change in leadership. A new strategy can significantly change a company's operations, target market, product offerings, or competitive positioning. If the new strategy seems ill-conceived or involves entering highly competitive markets where the company has no proven expertise, investors may consider it a reason to sell the stock.
However, it's important to remember that not all changes in leadership or strategy are bad. A new CEO may bring fresh ideas and energy to a company that needs it, and a shift in strategy may open up new growth opportunities. A careful analysis of the situation is necessary before making a decision.
Here are a few things to consider:
Track Record of New Leaders: Research the background and track record of any new executives. Have they been successful in the past, particularly in similar roles or industries?
Reason for Changes: Try to understand why the leadership change or strategy shift is happening. Is it a natural evolution, or is it a response to trouble within the company?
The Reaction of Other Stakeholders: Pay attention to how employees, customers, and other investors react to the changes. This can give you a sense of whether the changes are generally seen as positive or negative.
As always, any decision to sell should take into account your overall investment strategy, financial goals, and risk tolerance.
3. Changes in the Competitive Landscape
If a company's competitors introduce superior products or services or the company loses a significant market share, it might be time to consider selling the stock.
Changes in the competitive landscape can significantly affect a company's future prospects, and by extension, your decision to sell a stock. Here's how:
Increased Competition: If new competitors enter the market or existing ones ramp up their offerings, it could squeeze a company's market share and affect its revenue and profitability. The new competition could also lead to price wars, which can hurt profit margins.
Loss of Competitive Advantage: A company's competitive advantage, such as a unique product, superior technology, or strong brand, can protect its market share and profit margins. However, if this advantage erodes – for example, if competitors replicate the company's unique offering or a technology becomes obsolete – the company could lose customers, and its financial performance may suffer.
When evaluating these changes, it's important to consider whether they are temporary blips or signs of a longer-term trend. Some companies may be able to adjust to new competitive challenges and emerge stronger. Others, however, may struggle and see their financial performance deteriorate.
4. Changes in the industry or market
If new regulations, technologies, or market trends are poised to impact a company's future prospects negatively, selling might be the prudent move. Always try to stay ahead of the curve regarding industry trends.
Innovation and Technological Advancements: Rapid technological change can disrupt entire industries. If a company fails to keep up with these changes, it can quickly fall behind. Companies that are not investing in research and development or that are slow to adopt new technologies can lose their competitive edge.
Regulatory Changes: New regulations or legal rulings can change the competitive landscape by affecting industry practices or business costs. These changes can benefit some companies while hurting others.
Changes in Consumer Behavior: Shifts in consumer preferences can affect the competitive landscape. If a company fails to adapt to these shifts, it could lose customers to competitors better attuned to these changes.
5. Violation of Your Investment Thesis
If the reasons you bought the stock in the first place no longer hold true or if the company's future doesn't align with your investment goals, it might be time to sell. This is perhaps the most important indicator, with the most telling evidence. Questions you can ask yourself include
"Do I still believe in the company vision, product, or service offering?"
"Where do I think the company will be 5 or 10 years from now?"
"Does this company have the potential to grow 3x, 5x, 10x its current size?"
"Has this company become more or less risky since first investing?"
6. Better investment opportunities
Sometimes, the reason to sell a stock isn't because of problems with the company but because you've found another investment opportunity that you believe has a better potential return.
Perhaps I've been a Sams Club member for years, but I just discovered a Costco location opening up near me. I've quickly learned that Costco has better food, better prices, higher quality goods, and $1.50 lunch deals. It's just a better choice, so I cancel my Sams Club membership and switch to Costco. The same may be the case with investment opportunities!
(Spoiler: Costco is one of our exclusive Stock Picks - read more here)
The Bottom Line
Remember, these indicators are just a guide. The decision to sell a stock should always be based on a careful analysis of your financial situation, risk tolerance, and long-term investment goals. And if you're not confident about selling, you're probably better off hanging tight for the time being.