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:
KO (+18.46%… not a typo, same return as CVX!)
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)