3 Warning Signs It is Time to Sell a Stock
How do you know when to let go of your investment? Instead of freaking out or following the herd, do some number crunching.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Investing can be tough, as many people let emotions and outside opinions steer their decisions. There are so many ads now that make timing the market seem easy and tell you that trading is the best way to make a profit. This causes investors to be shortsighted and impatient. Many famous investors, such as Warren Buffett, Benjamin Graham and David Dreman, made their fortunes not by jumping in and out of stocks, but by looking at the value of a business and where it will be years down the road. The key distinction between these successful investors and many unsuccessful traders is they are not focused on returns over a few days; they are focused on the value of owning a business long-term.
At our firm, as long as the businesses remain strong and the stock prices remain reasonable, we will not sell out of our companies. To judge a business’ fundamental strength, we examine its balance sheet to ensure the company can endure any potential major downturn. A company with a weak balance sheet that faces tough economic challenges runs the risk of bankruptcy. For this reason, if the company shows one or two of these three warning signs, we will further analyze whether we should sell:
Warning Sign No. 1:
If a company has a debt/equity ratio over 150%.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Debt/equity is a great measure to show if a company is over leveraged. As an example, to better explain debt/equity, we tell people it is great if you own a $1 million home, but if you owe $1.5 million on that home then it’s not so great. There are some accounting policies that may negatively affect the appearance of the debt/equity ratio, but if the debt burden appears to be a large risk after analyzing the cash flow and equity of a company, we will sell at that point.
Warning Sign No. 2:
If a company has a current ratio below 0.6.
The current ratio shows the liquidity for a company and, more specifically, looks at 12 months of assets divided by 12 months of liabilities. If the current ratio is low, the company could be at risk of not being able to pay its current bills. Like debt/equity, there are some accounting policies that may negatively affect the appearance of the ratio, but if the company is in jeopardy of not being able to pay those bills, we will sell.
Warning Sign No. 3:
If the forward P-E multiple on GAAP earnings per share hits 16.5.
The only other time we will regularly sell out of a stock is if the future earnings of the company have become too expensive. The forward multiple is calculated by taking the current price divided by the estimated GAAP earnings per share. When that calculation hits 16.5, we sell.
We use GAAP, or Generally Accepted Accounting Principles, because this is the standard to which all companies must comply. If using non-GAAP EPS, there can be discrepancies between different companies and their earnings as some may choose to back out stock-based compensation, fluctuations in currencies or other expenses, while others may not. By using GAAP EPS we can ensure the playing field is level for all companies and we are comparing on an apple-to-apples basis. We use a multiple of 16.5, because that is the 40-year average for equities. Even dating back to the late 1800s, the forward EPS multiple was approximately 16. By using 16.5 as our forward multiple we can ensure we are not overpaying for a company’s earnings.
Maintaining discipline and having a company that trades at low valuations is important to long-term success. Over the course of history, results from value investing have been superior to those of growth investing. From 1926 through 2015 large-cap value stocks produced an average annual return of 11.2%, vs. 9.4% for growth stocks.
Throughout history we have seen time and time again that buying good quality companies at reasonable valuations will lead to strong returns over the longer term. Do not fall into the hype of Wall Street and let your emotions ruin your investment decisions.
-
5 Vince Lombardi Quotes Retirees Should Live ByThe iconic football coach's philosophy can help retirees win at the game of life.
-
The $200,000 Olympic 'Pension' is a Retirement Game-Changer for Team USAThe donation by financier Ross Stevens is meant to be a "retirement program" for Team USA Olympic and Paralympic athletes.
-
10 Cheapest Places to Live in ColoradoProperty Tax Looking for a cozy cabin near the slopes? These Colorado counties combine reasonable house prices with the state's lowest property tax bills.
-
Don't Bury Your Kids in Taxes: How to Position Your Investments to Help Create More Wealth for ThemTo minimize your heirs' tax burden, focus on aligning your investment account types and assets with your estate plan, and pay attention to the impact of RMDs.
-
Are You 'Too Old' to Benefit From an Annuity?Probably not, even if you're in your 70s or 80s, but it depends on your circumstances and the kind of annuity you're considering.
-
In Your 50s and Seeing Retirement in the Distance? What You Do Now Can Make a Significant ImpactThis is the perfect time to assess whether your retirement planning is on track and determine what steps you need to take if it's not.
-
Your Retirement Isn't Set in Stone, But It Can Be a Work of ArtSetting and forgetting your retirement plan will make it hard to cope with life's challenges. Instead, consider redrawing and refining your plan as you go.
-
The Bear Market Protocol: 3 Strategies to Consider in a Down MarketThe Bear Market Protocol: 3 Strategies for a Down Market From buying the dip to strategic Roth conversions, there are several ways to use a bear market to your advantage — once you get over the fear factor.
-
For the 2% Club, the Guardrails Approach and the 4% Rule Do Not Work: Here's What Works InsteadFor retirees with a pension, traditional withdrawal rules could be too restrictive. You need a tailored income plan that is much more flexible and realistic.
-
Retiring Next Year? Now Is the Time to Start Designing What Your Retirement Will Look LikeThis is when you should be shifting your focus from growing your portfolio to designing an income and tax strategy that aligns your resources with your purpose.
-
I'm a Financial Planner: This Layered Approach for Your Retirement Money Can Help Lower Your StressTo be confident about retirement, consider building a safety net by dividing assets into distinct layers and establishing a regular review process. Here's how.
