Determining when to sell a stock is tough. Although there are no easy answers or simple strategies, the following work sheet can help you get started on the types of questions you should ask.
It helps if you analyze the stock with some of the same questions you asked when you bought it. Many analysts suggest, for example, that you look at the company's quarterly earnings reports, checking for profitability, growth and changes in corporate strategy.
If the company's strategy and basic finances are as good as they were when you bought the stock, hang on. If they're not, consider whether you would still buy it today.
1. Are quarterly earnings up from the same quarter a year ago? (It's better to compare a quarter's earnings with the year-ago quarter's, rather than the preceding quarter's, because many businesses are cyclical. They pull in the bulk of their profits in one or two quarters, rather than evenly throughout the year.)
2. Are earnings up at least as much as you anticipated when buying the stock?
3. If not, is the reason for the lackluster performance the result of encouraging news? For instance, occasionally a company will post a down quarter--or year--because it is growing at a rapid clip and spending its cash to fund growth. If that's the case, and there's good reason to believe that demand for the company's products or services will continue to be strong, it may be worth waiting through a few bad quarters to get the long-term benefit of the expansion. On the other hand, it's a bad sign when the company says earnings are down because sales are slack or because competition is unexpectedly stiff.
4. What is the company's current price-to-earnings ratio? (That's per-share market price divided by per-share net earnings.)
5. What is the company's expected earnings growth rate? (Value Line Investment Survey, which is available in most large public libraries, projects this.)
6. Is the company's projected growth as high as the current price-to-earnings ratio? In other words, if the company's earnings are expected to grow 20%, is the company's P/E at 20 or less? If your answer is yes--and answers to the previous questions were also positive--stop here. Your stock is still worth owning. If you've answered "no" here or in previous questions, go on to questions 7 and 8.
7. Would I buy this stock today? (See last week's lesson on stock picking and accompanying work sheet.)
8. Can I invest my money at a better rate of return or with a better company that has brighter prospects?