When to Sell a Stock

Here is a great article I read at Kiplinger.com With everything in the market being so up and down you may find this article useful plus you can find a whole bunch of great articles and tips just by visiting Kiplinger.com

To make the decision easier, look for these four signs.

By Cameron Huddleston, Contributing Editor, Kiplinger.com

January 31, 2008

The right time to unload shares is one of the toughest calls investors have to make. Even professional traders and money managers admit it can be difficult. "It's a lot easier to buy a stock than to sell a stock," says David Giroux, manager of T. Rowe Price Capital Appreciation fund.

That's because if you sell when a stock is down, you feel like you're giving up, Giroux says. And it rarely feels right to sell when a stock's price is soaring -- even though that can be the best time to sell.

Now, there's nothing wrong with holding a stock 20 or more years -- if it's the stock of an exceptionally well run company, says Giroux, who tends to hold stocks for three to five years in his $10.5 billion fund. But even if you're a buy-and-hold investor, you need to learn to say "sell" sometimes.

The market's recent volatility might be making you want to say, "Sell it all. I'll sit this out until things calm down." But you shouldn't let fear guide your investment decisions. Instead, look for these four signs to help you decide if the time is right.

1. A change in the company's fundamentals. Usually the best clue for when to sell a stock comes from the issuing company, itself. If a company's earnings stop growing, if its top management quits or is forced out, if it stops creating new products, or its products aren't receiving regulatory approval, the company's shares could be headed for a fall. Kiplinger's Portfolio Tracker can help you keep tabs on a company's performance.

One sure sign of trouble is if a company is having cash-flow problems, Giroux says. A cash flow statement gets to the guts of a business -- the cash it receives and the cash it pays out. It's especially handy when researching companies that don't have profits. You can find the information in the company's annual reports, accessible on its Web site, or sites such as Yahoo! Finance and Zacks.

Giroux says look for changes in free cash flow: 1. Is operating cash flow growing slower than net income? 2. Is inventory rising faster than sales? 3. Are receivables rising faster than sales? These are early warning signs that it might be time to sell the company's stock.

2. The stock's too hot. If a company's stock price is soaring but its fundamentals, such as earnings growth, aren't following suit, it's time to sell, says Jerry Jordan, Jr., manager of Jordan Opportunity fund. A stock with an especially high price-earnings ratio may be the victim of investors' unrealistic expectations. To calculate this familiar measure of a stock's value, divide the current share price by the company's earnings per share.

You can compare a stock's P/E with that of the overall market, the average P/E of its industry, or against the company's past P/Es. If the company's ratio is unusually high, it could have a hard time sustaining that price.

Jordan recommends picking a target P/E when you first invest in a stock. If the price jumps but the earnings keep up, you won't have to sell. This method can help give you the discipline to dump the stock before it becomes overpriced.

3. The stock's not keeping up. The market's rallying, but your stock isn't. This can be a sign to sell, Jordan says, especially for popular or trendy stocks that tend to move in sync with the market. For example, if stock was $100, drops to $80 but doesn't bounce back or even falls below that level, sell.

4. The stock is taking over your portfolio. If you went into your stock purchases aiming for diversification, revisit your portfolio once a quarter to see if your holdings are still in balance. If you have one or two big winners and their futures still look bright, you may want to consider taking some profits off the table -- and adding to your other holdings -- just so you won't be overexposed if the unexpected happens.

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