Selling a Stock

When there are brighter prospects. See how!

Selling a stock to better allocate capital to a company with brighter prospects is something I consider.

From time to time, some companies in my portfolio may not perform as well as I would like, measured in terms of their internal rate of return.

If after three years the return on a stock exceeds 10% but has not reached 15%, I usually hold the investment as it represents a lesser drag on the portfolio performance ... and it is making a return which is not going to be matched by investing the capital in my investment account.

I also know that some of my share holdings are achieving better than a 15% annualized return. So I can live with some in the 10% – 15% range.

Selling a stock in a circumstance where I need the capital to invest in another company that appears to have much brighter prospects is something that I do not shy away from.

My experience tells me that opportunities present themselves if I have the time to search and read.

The clues are usually provided by interim and annual company reports, together with articles in the financial press.

However, as stock markets move towards the latter stages of an extended bull market, the opportunities are much less numerous compared to earlier points in market cycles.

Keeping an eye on the average stock market price earnings ratio and the sector P/Es provides an indication of how overvalued the market is becoming.

But some sectors can become overheated while the overall market P/E looks in good condition. Other sectors may be under performing the average stock market P/E. All is not always what it seems!

I look for companies that have been out of favor because of some concern about their operation, or with the sector in which the company operates. And I ask myself if the concern might be overcome in the short to medium term.

Concerns about companies may arise when ...

• a company has not achieved its profit forecast for some reason
• unfavorable moves in exchange rates have affected the profits of an importing or exporting company
• a drought is affecting the performance of a company
• a company is bedding down an acquisition and investors are not convinced it will go according to plan
• a company is affected by temporary changes in consumer tastes
• fuel-price spikes are affecting a company's profits

... and the list can go on.

These short to medium-term reasons help to explain why some companies become undervalued.

A close study of the company and its operations can provide the confidence required to invest in it, particularly if it has a strong earnings stream, is not too small, and satisfies my other value criteria such as a strong return on equity.

Then I ask myself whether the company directors are continuing to invest their own money in the company while the market concerns continue to exist.

Put all this together and this gives you an idea as to how I find brighter prospects and why I consider selling a stock to re-allocate capital.

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