Some signs that say it’s time to sell your stock

June 29, 2008


Buying and holding is a tried and true investing standard.

It has worked for some of the most successful investors of all time.

But that doesn't mean that sometimes there isn't a good reason to sell a stock in your portfolio.

From Rex Moore at the Motley, consider these three signs that it's time to sell:

¢ Selfish management. If the executive team starts worrying more about lining its own pockets than about creating value with the business, it's time to let go.

For clues, keep an eye on excessive compensation, aggressive accounting, active insider selling and declining market share.

A classic example occurred at Tyco a few years ago, under former CEO Dennis Kozlowski's watch. (Fortunately, current CEO Ed Breen brings an air of responsibility to the company.)

¢ Competitive disadvantages. Competitive advantages lead businesses to high returns on capital and equity, and they include things such as a strong brand.

PepsiCo and Anheuser-Busch can price their products a bit higher than most competitors do because they know consumers are willing to pay a few pennies more for a Pepsi, a Gatorade or a Budweiser.

These two companies also have other competitive advantages with regard to economies of scale and supply-chain management.

But if your company is facing weak pricing power, a declining customer base and lower market share, it's probably operating at a competitive disadvantage.

¢ An unstable financial model. Let's look at some positive examples. Think of eBay, Altria and 3M.

They're known for stable or rising margins, tight control over working capital, steadily increasing sales, loads of cash from operations and a huge surplus on the balance sheet.

Companies that are heading in the opposite direction in two or more of these categories are showing a big red flag.


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