When market volatility strikes, we often get questions from clients about selling a stock that may have taken a big hit. Investing can test our emotions, but reacting out of fear is typically not the answer. For long-term investors, we advise against watching day-to-day market moves. With that said, there are times when you can and should consider selling a stock. Selling could mean either eliminating it from your portfolio completely or trimming part of your position in the company.
Whether you’re working with an advisor or investing on your own, it’s important to understand a few logical and data-driven themes when considering if you should sell a stock:
- Bad news: Negative news may come out about a company you own. It could be something like a data breach, management malfeasance, or a major product recall, and while it may not always impact earnings, it’s critical that investors keep an eye on the severity of the issue and if it escalates. Additionally, if senior leadership changes due to bad news, investors should not immediately see this corporate restructure as a red flag. At Girard, we give more weight to whether the replacement is a qualified leader and how it might impact the overall business moving forward.
- Unexpected change in corporate strategy: When a company makes a change in its strategy, we absolutely perk up. An example is a company making an acquisition that fundamentally changes its capital structure and the mix of debt and equity on its balance sheet. Acquiring a company it isn’t always going to benefit the bottom line. If the value of the purchase isn’t going to pay off and adds more debt, the company may do an equity raise and issue more shares, which would dilute the value of your investment.
- Valuation: Technical valuations of a company can be complex and difficult to monitor. If you’re not comfortable with following the intricacies of an investment, it might be better to invest in exchange-traded funds (ETF) or mutual funds. However, if you’re comfortable with this data, then there are a few things to consider. It’s extremely important to know where we are in a current business cycle and how it relates to earnings. If the economy is far into an expansion, the stock might be at a higher multiple. If a company doesn’t have earnings, price-to-book and price-to-sales could be more helpful ratios to review instead of price-to-earnings. Finally, consider the company you own against its peer group and historical average in relation to others.
Investors should consider diversification, allocation and position of assets with an intended goal. Understanding when to sell stocks takes a lot of time, desire and expertise, and if you’re not attentive to the market, news and the economy you may run into problems. If you have any questions or want to talk about investing strategies, contact a Girard Advisor to start the discussion.
These articles and reports are for general information purposes only and are not intended to provide legal, tax, accounting or financial advice. The information in these articles or reports, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.
Girard is a marketing name used by Univest Financial Corporation to provide (1) investment and wealth management, fiduciary services and trust services through its subsidiary Univest Bank and Trust Co., (2) specific fiduciary and investment advisory services through Girard Advisory Services, LLC (3) securities products, insurance products and brokerage services through Girard Investment Services, LLC, a registered broker-dealer and member of FINRA and SIPC, and a licensed insurance agency, and (4) investment management and related products and services for Pennsylvania municipal entities through Girard Pension Services, LLC. Investment products and services are not FDIC insured, not a bank deposit, not bank guaranteed, not insured by any federal government agency and are subject to risks, including possible loss of any principal amount invested.