By Corry DalMaso
STB Investor Software
Inc.
Just as you need an organized approach to determining whether to buy a stock, you need an organized approach to selling. The same BetterInvesting techniques and tools may be used in both cases.
Often there are signs which point to the need to pay closer attention to a company you hold in your portfolio.
1. Declining growth rates for sales and/or earnings.
These almost always lead to declining Price to
Earnings (P/E) ratios and lower market prices.
2. A gradually-declining growth rate for sales and
earnings may be the result of a company transforming
from a high growth to a maturing company. Watch the
research and development spending rate and the company's
introduction of new products and services. These can
affect the company's future growth rate.
3. If a company pays a higher percentage of earnings in
the form of dividends, this leaves less to reinvest
in the business of growing the company.
4. If the company has new management come in, you may
want to pay particular attention to what changes
are made. It may take 6 months to 2 years (depending
upon the size of the company) before management's
ability can be accurately assessed.
These reasons are really the opposite of the reasons for buying. In both cases, the BetterInvesting techniques and tools are used and judgment is applied.
1. Growth is not satisfactory. It is very difficult to
achieve bottom line (earnings) growth without top
line (sales) growth. Use PERT and the SSG graph to
judge this growth.
2. Profit margins are eroding. Use PERT to check the Pre-tax
Income growth and the growth as a percent of sales.
3. The management's competence is under question. Examine PERT
to note the growth in the various categories.
4. The investment climate for the company or the industry is
deteriorating and no improvement is seen on the horizon.
5. The stock is grossly overpriced. Use the SSG to check the
P/E ratio against the 5-year average, using a 12 month
leading P/E. If the P/E is one and a half times the
average, and the upside-downside ratio is less than 1,
it is time to consider selling.
6. The stock price is declining for no apparent reason.
Institutional investors may know something you don't know.
You can see the price history graphically if you have filled
in the PMG stock prices several times a year.
7. The dividend payout ratio is too high (above 50%, except
for special situations like utilities) and/or the percent
earned on equity is too low. (Look for negative changes.)
8. The company's financial condition is deteriorating. Watch
the amount of debt taken on and whether the company can
meet payments if the economy slows.
9. To balance your portfolio. Avoid overweighting by company
size, industry, or company. (See "Diversification" for
more on this topic.)