When Should I Sell a Particular Stock?

Deciding when and what stock to sell from a portfolio would seem to be a straightforward process. Guess what? Determining when and what stock to sell is one of the most challenging aspects of investing. If we bought and held the stock for infinity, selling would not be an issue. Of course, investors do not hold stocks forever. At some point, you will have to pull the “sell trigger.”

The first step in the process will involve determining which of the stocks in the portfolio is under performing. The second step will involve determining when to sell the under performer. Historical growth graphs and independent analysts can aid in the decision-making process.

Generating growth graphs as described earlier in this book will greatly facilitate the sell decision-making process. These graphs will immediately point out under performers. For example, the following growth graph instantly points out a sales/share problem.

How can the earnings continue to grow without growing sales/share? The company must have a new blockbuster product in the pipeline otherwise the share price would have crashed a long time ago. Consider selling all of your stocks that do not maintain strong historical sales/share and EPS growth.  

In addition to growth plots, consult your independent analysts for future 3-5 year earnings estimates. Compare the new estimates with historical estimates. If the new estimates fall below 20 percent, or substantially from where they have been, consider selling. For example, if the company’s EPS growth rate has been 37 percent for the last five years and the analysts are predicting a 3-5 year growth rate of 22 percent, consider selling. The company may be slowing because of market saturation, competition, and or a change in management. 

Monitor changes in management very closely. Consider selling stocks that experience major management changes especially if the change involve the founders.

Any slowdown in earnings will be met with selling and a reduced share price, so consider selling stocks that are not projected to grow at the same rate or faster than they have been growing. When should an under performer be sold?

The same techniques used to determine a “buy zone” can be used to determine a “sell zone.” Simply, inverse the logic. Sell when the current P/E is higher than the historical P/E. Sell when the current price is above the estimated midpoint between the high and low price per share.

Plots of moving averages can help locate exit points just as they can identify entry points. Exit points are created when the shorter (50-day) moving average drops below the longer (200-day) moving average (point A on the following graph).

Selling a stock that you have held for 5 to 10 years can be difficult. Try not to become attached to stocks. Never assume every stock you buy will be a winner forever. Do not buy and hold to infinity.