Sell if Stock Fundamentals Change
Investors often become attached to their stocks, lose objectivity, and often ignore or don’t see the changes to the underlying company’s fundamental business and financial prospects. To keep yourself on the right investing path, make sure that you monitor your stocks using objective methods and be ready to act if you need to. In this article, we’ll briefly discuss what fundamentals to monitor, and give some tips on when to sell your stock if they change.
What are a stock’s fundamentals?
By stock fundamentals, we really mean the fundamentals of the company behind the stock. Fundamentals are the basic building blocks used to assess and evaluate company’s quality and growth prospects. Here are some of the more important ones to watch.
- Management. How experienced, deep, and open to change are the company’s management team.
- Revenue. What is the level of revenue for the company, how has it grown historically, and what are the prospects for future growth in sales.
- Earnings. How profitable is the company, and how has it changed over time.
- Competitive Position. Is the company a market leader or follower, and how is its market share changing?
- Research and Development. How committed is the company to developing new ideas and products that will keep it growing?
- Products. Does the company offer superior products? Are they unique, a commodity, or similar to their peers.
When to sell based on fundamental changes:
- If the management teams seems unable to meet changing times and demand.
- If the management teams is selling a lot of stock.
- When a company lowers its earnings and sales growth forecasts without a solid reason.
- When a company is consistently unable to bring higher revenue figures to the bottom line.
- When a company’s products start to become outdated or lose market share.
- When a company is consistently losing market share without a solid reason.
- If a company falters more than once while other companies in its industry are doing well, it may be a good time to sell the company’s stock.
Our conclusion.
Monitor your investments and if the fundamentals behind them change, don’t hesitate to sell them. Many stocks and even mutual funds change, and when they change enough, they shouldn’t be part of your investment portfolio anymore. For example, suppose you own stock in Wal-Mart and are losing money. You may not want to sell at a loss. However, assume that Target is starting to take market share and Wal-Mart changes its strategy from growth to price cutting and loses some of its top management. It just doesn’t make sense to keep the stock anymore. You bought it because you trusted their management and for its growth prospects. Now that those factors have changed, don’t hesitate to get rid of it and invest in something else that fits your investing plan.
Stock prices will always fluctuate. Don’t try to time the market and buy and sell based on these swings. Rather, watch for the underlying business to change. When you see change that doesn’t meet your objective, get rid of the investment. Don’t sell just because the price goes down or up.
Related posts:
