Is It Time to Sell These Losers?

As the market fell and investors panicked, The Motley Fool held a live chat Monday between Fool readers and our writers and analysts. Among the many questions our readers posed: "How do you know if it's time to sell a loser and go with another stock instead?" There are lots of times to sell, but you need to distinguish between temporary and permanent problems.

The market's deep dives have left investors hyperventilating, their fingers hovering nervously over the "Sell" button on their brokerages' trading platforms. They've just been reminded how volatile the stock market can sometimes be; some of their holdings are down a lot; and they have an urge to take their losses and perhaps swear off stocks altogether.

Frankly, that's a terrible idea. If you're going to invest in stocks, you have to accept that the market will occasionally crash, but that its long-term trend has been upward. Great stocks don't move up in a straight line -- they zig and zag. Jumping into the market when it's been booming a while, and bailing out when it crashes, is a perfect way to lose money. Giving in to greed and fear can deliver you to the poorhouse.

Let's review some of the many reasons why you might sensibly sell a stock -- and move the proceeds into something else.

Overvaluation
If a stock's price seems to have gotten way ahead of itself, consider selling. It may now be more likely to fall closer to intrinsic value than to keep advancing. The stock market's recent swoon should make this less of an issue for most stocks. For example, by several measures, Krispy Kreme (NYSE: KKD  ) looks overvalued. The company has been turning itself around, but it doesn't appear to be a screaming bargain quite yet.

Of course, some companies, such as Amazon.com, almost always seem overvalued, but they keep advancing year after year. SodaStream (Nasdaq: SODA  ) is one company appearing overvalued on a P/E basis, but many Fools are optimistic about its make-your-own-soda-with-our-cartridges business.

Insufficient information
Ask yourself how well you really understand your holdings. If you can't explain what a company does and exactly how it makes its money, you may end up with some nasty surprises. Either learn more about the company, or sell it.

Consider Chimera Investment (NYSE: CIM  ) . Its business model involves borrowing money at today's very low interest rates, and investing that cash in mortgages. Rising interest rates will eventually challenge its profitability to some degree. The Fed's promise to keep rates low for another two years may make Chimera a safer bet for now, but you still need to understand how interest rates affect this business.

Changed premise
Many times, the reasons we buy a stock disappear. You might have invested in Eastman Kodak (NYSE: EK  ) years ago because of its dominance in cameras and film. But film photography has since grown moribund, and Kodak's business model has changed to focus more on licensing its various technologies. You'll need to determine whether that new purpose still makes the company attractive in your eyes.

Alternately, Dendreon (Nasdaq: DNDN  ) and its promising cancer treatment, Provenge, may have caught your eye. But the drug's astronomic price tag has proven to be an obstacle, and competitors such as Exelixis (Nasdaq: EXEL  ) are working on other prostate cancer treatments. A disappointing recent announcement sent shares down 65%! It's time for shareholders to reassess their confidence in this company.

Caution signs
Paying attention to your holdings can pay off when you spot potential trouble. Advanced Micro Devices (NYSE: AMD  ) might look good on the surface, having recently reported estimate-beating earnings. But a closer look reveals worrisome trends, including shrinking gross margins and dwindling sales in its graphics division.

Temporary vs. permanent
Before you sell a stock, ask yourself whether the condition driving you to sell will soon pass by, or whether it's here to stay.

Gobs of stocks have lost a lot of value recently, falling along with the overall market. But much of that drop wasn't related to each individual stock. Automakers' sales didn't suddenly drop 5% or 10%. Delivery companies were not suddenly facing sharp declines in volume. Merck saw its price fall along with the market, but people living with medical conditions won't abruptly stop taking their medications, and the drugs in Merck's pipeline haven't become less likely to win approval.

Your best ideas
When deciding whether to sell, ask yourself whether you're invested only in your best ideas. After all, why put any money in anything other than the companies that inspire the most faith and hold the greatest potential? If any holdings are not your best ideas, consider selling and moving that money into more likely winners.

Want some great stock ideas? Help yourself to a copy of this new report: "5 Stocks the Motley Fool Owns – And You Should Too." It's completely free for Fool readers.

Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Chimera Investment and Exelixis. Motley Fool newsletter services have recommended buying shares of Amazon.com, SodaStream, and Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy


Read/Post Comments (9) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 10, 2011, at 3:48 PM, hiddenflem wrote:

    "A disappointing recent announcement sent shares down 65%! It's time for shareholders to reassess their confidence in this company."

    The article seems to suggest that EXEL should be evaluated because DNDN is having reimbursement difficulties and it also has a prostate drug? or is it just a name drop to get EXEL holders to try to read the article? Elaboration would be helpful...what exactly was the point of mentioning exel?

  • Report this Comment On August 10, 2011, at 4:05 PM, lenholliday wrote:

    My friend Jim Morgan is the CEO of Krispy Kreme(KKD). That makes it a buy. I was a stockbroker in Anderson,S.C. for 20 years. While I was Branch Manager of Interstate/Johnson Lane which was a Southeast Reginal Brokerage firm, Jim Morgan put this company on the map. When he went to work as CEO the stock was $1.75. By the time Jim Morgan moved on the stock was $58 per share and sold out to Wachovia Bank. KKD is a great investment. Buy it today and watch your money double over the next year. lenholliday@yahoo.com or firsthandweather.com

  • Report this Comment On August 10, 2011, at 5:07 PM, prginww wrote:

    these people are paid off by intel to bash amd , its the only thing intel can do cause they can't compete with amd fusion

  • Report this Comment On August 10, 2011, at 10:15 PM, keithpirelli wrote:

    `If you're going to invest in stocks, you have to accept that the market will occasionally crash, but that its long-term trend has been upward.`

    This statement is either desperately naive or disingenuous in the extreme.The DJ has gone nowhere for 12 years! Unbelievable literary garbage.

  • Report this Comment On August 11, 2011, at 9:42 AM, rav55 wrote:

    You don't sell low you moron. If your company is profitable and is showing signs of growth you stay the course. You hold your position and you dollar cost average.

    The market did EXACTLY the same thing last summer.

    Remember the blind target shooter who ran around waving his arms protending doom and crying "the sky is falling" with the Hindenburg Omen?

    There was a comparable mid summer sell off. Come September the market immediately turned around.

  • Report this Comment On August 11, 2011, at 9:48 AM, TEBuddy wrote:

    If you actually dig deeper into AMD's business, you would realize it is on an upswing in product offereing and income. And AMD has turned the company into something that is sustainable, well running machine now with much lower costs and better performance that will only get better from now on.

  • Report this Comment On August 11, 2011, at 3:14 PM, libra4us wrote:

    About AMD, changing to die-buy instead of wafer-buy will improve gross margins and provide better cost control.

  • Report this Comment On August 12, 2011, at 9:54 AM, lflb56 wrote:
  • Report this Comment On August 12, 2011, at 10:32 PM, libra4us wrote:

    AMD – ROI & Risks:

    1/2011 – Brazos E- and C-series APUs for low-end laptop/notebook and netbook PCs

    6/2011 – Brazos Z-series APUs for tablet PCs

    6/2011 – Llano A-series APUs for mainstream laptop/notebook and desktop PCs

    8&9/2011 – New generation of chips for servers and high-end desktops

    GPU chips for game consoles

    Die buy instead of wafer buy (Cost control)

    Some products made by TSMC (Cost control)

    Stock shares oversold by 17.6% (as of 7/29/2011)

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