Selling A Security

Here's another article on selling a stock which I think it is pretty good.

Selling a security (17th January 2006)By - Chetan Parikh
“A well-defined sell strategy is important.”

“A well-defined sell strategy is as important to Calamos's investment process as his buy strategy. John will liquidate holdings for a variety of reasons, including:

Ø Deceleration in relative CFROTC, revenue growth, or earnings per share growth: John wants to be invested in companies that sport the best growth prospects at any point in time. A deceleration in anyone of these factors indicates that a firm may no longer fit that category.

Ø Expectations that a firm's operating margins, earnings, or revenue will fall short: Stocks often tumble after they miss expectations on one of these factors in an earnings report. A shortfall in one of these categories also frequently presages problems that eventu­ally cause earnings to decelerate.

Ø Price can not be sustained by a company's growth: The risk/reward profile becomes unfavorable when a stock's price reaches a point where the firm's expected growth no longer supports it.

Ø A better opportunity: John wants to keep the portfolio fresh with the best ideas at any given time. That requires liquidating current holdings to take advantage of new superior opportunities.

Ø Balance sheet deterioration: When a company's balance sheet weakens, firms lose financial flexibility, which can cost them future growth.

Ø Significant management changes: New leadership can introduce a significant risk to a business's future growth prospects. Look at what happened to Coca-Cola after Roberto Goizueta died. Calamos avoids situations where he cannot understand the risks involved.

Ø Bad news: This includes any information flow that leads Calamos to believe the firm's sustainability of earnings growth is at risk.

Ø Industry problem: Industry-level problems often affect the stock prices of all companies in the industry, even those not affected by the difficulties.

Here's an interesting exercise to do.

Take the most recent so-called investment grade stocks which have witnessed huge decline in their stock prices and compare the issues mentioned with those stock.

For example:

Deceleration in revenue growth, or earnings per share growth. Was this evident in those stocks?

The risk/reward profile becomes unfavorable when a stock's price reaches a point where the firm's expected growth no longer supports it.

Very interesting point isn't it? Remember earnings growth is finite. It cannot grow at an exponential rate forever and ever. And when the stock's reaches a point in which it cannot meet ze market expected growth rate, more likely than not, the stock will face a huge tumble!

Remember in most growth stocks, ze market prices them growth stocks based on their future growth. Now if the future growth is not there, then it means the stock's valuation is trading at a very high valuation... and the outcome?

Balance sheet deterioration: When a company's balance sheet weakens, firms lose financial flexibility, which can cost them future growth.

Ahh... balance sheet deterioration! Ahem! This issue is sooooooooooooooo important, isn't it?

:D