Stock "Sell" Criteria


Just as there are criteria for buying a stock, you should formulate criteria for selling stocks you hold. There are certain "red flags" that will be raised that may cause you to re-evaluate a stock you hold. Not surprisingly, many of your sell criteria will be just the opposite of your buy criteria. You may discover many of the "red flags", warning you to re-evaluate a stock, while developing your buy criteria.

Keep one thing in mind when setting your sell criteria - it is usually better to keep your money in a stock and add to it over time than to sell at the first sign of bad news! Analysts have shown that over the past 50 years, if an investor pulled their money out of the market during the 6 months that the market grew the most, they would lose almost 40-50% of their profit!!! When you see a stock that is faltering, make sure there is good reason to sell - if the stock is still solid, this may be a good time to buy and dollar-cost-average your holding in that stock!

As with your buy criteria, your sell criteria should be adjusted to fit your club philosophy. Your criteria should be dynamic enough to change as the club changes



SSIC "Sell" Criteria

1. The company shows no potential growth.
2. The current EPS falls below the EPS for the same quarter in the previous year.
3. Annual EPS does not follow the growth pattern of the previous three years.
4. P/E ratio rises above the past three-year average P/E.
5. P/E ratio rises above 30.
6. Zoning for stock price rises into the "Sell" range.
7. Growth rate doesn't reach projected level in one year.
8. Company is receiving negative press.
9. Adverse management information.
10. Company depends on a single product or customer.
11. Industry is experiencing a downturn.
12. Competition becomes too severe.
13. Re-evaluate if stock has doubled in value from the price at which it was purchased.


WHEN TO SELL
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 NAIC techniques and tools may be used in both cases.


Signs of Change

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.

Reasons for Selling

These reasons are really the opposite of the reasons for buying. In both cases, the NAIC 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.)


Please email ssic@writeme.com


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