Investors face one of their hardest decisions when it comes to selling stocks. With only three per cent to eight per cent of stock recommendations being 'sell' or 'underweight,' according to Business Insider, the market is heavily biased toward buying. Everyone has a story of a stock they should have sold but didn't. Over the summer, this column will highlight reasons to sell and strategies to cope with selling, but first, here are reasons not to sell.
When a Stock Is Up a Lot
Suppose you own a stock that has risen 150 per cent since purchase. You might want to lock in profits, as the saying goes: 'nobody ever went broke taking a profit.' However, selling a winner means missing out on potential further gains. Positive momentum is powerful, and other investors are buying for a reason. While you can't go broke taking a profit, you also can't see a stock rise 1,000 per cent if you sell at 150 per cent. According to Bloomberg data, 94 North American stocks have risen 1,000 per cent or more in the past five years. Sell to raise cash for a major purchase or to cover debt, but not just because a stock is up.
When a Company Misses Estimates
Companies often miss earnings estimates, causing stock prices to plummet. But short-term misses can be misleading. A miss might occur because analysts were wrong, the company is spending for future growth, or a product launch is pending. Long-term investments should be held for years, not quarters. For example, Nvidia Corp. missed its third-quarter earnings estimates by four per cent in 2018, causing an 18 per cent drop to US$4.11 per share. The stock is now around US$200. Selling on a single miss can mean missing huge gains.
When the Market Drops Sharply
Bad short-term news like wars, inflation, or political moves can cause market drops. On June 5, the Nasdaq fell 4.18 per cent in one day due to interest rate fears and tech stock declines. However, a single-day market drop rarely impacts a company's fundamentals. Companies continue to generate earnings and cash flow. Unless the company is an asset manager, the drop is unlikely to affect its business. Don't panic-sell a good investment based on short-term market noise.
When a Stock Declines on No News
Sometimes a stock falls without any company-specific news. Investors may worry about hidden problems, but there are many benign reasons: a large seller, a fund rebalancing, or a margin call. Without a press release, insider trading disclosure, or competitor news, the reason is unknown. Selling based on a guess is risky. As 5i Research advises, never sell a stock on a guess.
