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Five signs it could be time to sell some stock

3 May 2016 in Investing Insights

Key Takeaways

  • Look for signs of trouble in a company's financials compared to the Street’s expectations.
  • If a stock is underperforming its peers or sector index, something may be amiss.
  • Reinvest profits by rebalancing if your portfolio's allocation becomes lopsided.

Selling an old car or watch is easy.

Selling stocks, on the other hand, can be tricky. You may have banged your head against the wall when you’ve either sold too soon or foolishly held on to a position too long.

It isn’t always simple deciding if and when to sell stock. Finding an optimal time to take profits, reduce a position or exit the market takes practice. Greed can trick you into believing that prices will grow to the sky forever. Or a market downswing could tempt you to sell at the bottom and run for the hills.

Before you do anything rash with your portfolio, pause for a moment and put down that big red panic button. First of all, don’t let emotions rule your investing decisions. Second, never assume your investments are bullet proof.

Economic conditions and company forecasts are constantly changing.

To help save your head from injury, we’ve pulled together five signals that may warrant a re-evaluation of your stocks.

  1. Something smells fishy in the fundamentals. Pay close attention to investment-related news on a regular basis. Has a sudden change in management occurred? When C-level leaders abandon ship or are pushed out, deeper problems can be brewing. A well-paid leader wouldn’t logically leave a good thing for something worse. Likewise it’s a bad sign if a company has stopped creating new products or services. Watch out if growth has come to a stand still.Look for signs of trouble in a company’s cash management. Changes in free cash flow can act as early warning signs to sell. Concerns include inventory rising faster than sales, operating cash flow growing slower than net income, declines in revenue and slashed dividend payments.
  2. The stock isn’t keeping up. Popular stocks have a tendency to move in sync with the market. If you own a stock that generally tracks an index but starts lagging behind, something could be amiss.Analyze how a company stacks up against its competition. Find out which companies in the industry are gaining market share and developing more innovative products. If competitors are pulling ahead, it could be time to sell before your stock declines further.
  3. The stock reaches your price target. Savvy investors set price targets they want to reach when they purchase a stock. These price targets can change over time as well. Review historical and projected earnings, current valuations versus valuations of a company’s peers, economic conditions and the status of a company’s competitors to determine a stock’s fair value.Don’t waste time and money trying to time the markets. Utilize Motif’s price alerts to notify you when your price target is reached on your investments instead. You can also place limit or stop orders to help you determine when to sell. An opportune time to sell a stock is when it is trading above its target price. In other words, aim to sell a stock when you believe it is trading higher than its true value.
  4. An overreaction occurs on positive earnings news. Earnings announcements can provide insightful information about significant changes to a company’s income statement, balance sheet and cash flow statement – or lack thereof. Watch out if a company’s earnings miss or beat consensus estimates. Sometimes overreactions occur in the market and savvy investors can act on those moments.Examples of overreacting markets: a 5 percent beat in latest quarterly earnings causes a 30 percent increase in the company’s share price. Perhaps there’s a fundamental shift in strategy that permanently increases a company’s terminal value. Or perhaps there’s simply a large short squeeze due to short-term expectations that has caused the stock price to react irrationally. If an investor suspects that a stock has risen too high based on its fundamentals, an opportunity could arise to sell before reality sets in.
  5. You’re due for a rebalance. Just like work and life can get out of balance sometimes, so can your investment portfolio. It’s good practice to examine your portfolio’s allocation on a regular basis, such as once a quarter. Do a few winners stand out in your account? If your intended allocation strategy has drifted, you can easily bring it back into alignment by rebalancing. You can take some profits on your winners and reinvest it into holdings that have shrunk in exposure.Rebalancing motifs in your account is as simple as a few mouse clicks . We periodically review the motifs in our catalog to help ensure they continue to reflect their original investing ideas. Then we automatically alert you when updates are available. You can also choose to add funds when you rebalance and save money on commissions.

So, there you have it. Selling stocks isn’t rocket science. It gets easier with practice and taking the time to do your research. Learn why Motif Investing is unique. Ready to get started? Open an account today.

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