Q: One of my companies just missed earnings and revenue expectations. Is it time to sell my shares?

The short answer: no. Just because a company's quarterly earnings didn't meet analysts' expectations doesn't automatically mean that you should sell the stock.

Don't get me wrong -- the "headline" numbers of earnings per share (EPS) and revenue are certainly important. However, you should look at the factors affecting those numbers to determine if you should sell.

As an example, one stock I own in my portfolio is Goldman Sachs (NYSE:GS), which just posted a rare earnings and revenue miss. The main culprit was a drop in trading revenue, which spooked investors because many of Goldman's peers reported stronger numbers in that area.

However, a closer look shows me that my reasons for owning Goldman -- my investing thesis -- still apply. Specifically:

  • Goldman maintained its No. 1 positions in announced mergers and acquisitions, as well as in equity and common stock offerings so far in 2017.
  • Goldman's investing and lending revenue grew to its highest level in four years.
  • The company's management did a good job of controlling expenses. Despite 27% year-over-year revenue growth, Goldman's total expenses grew by just 15%.
  • Goldman announced a 15% dividend increase, as well as the authorization to repurchase 50 million of its shares, an aggressive return of capital to shareholders.

In a nutshell, you should sell a stock because your reasons for believing in it as a long-term investment no longer apply, not because it missed earnings estimates by a few cents. For example, if Goldman had reported that it was losing market share, or expenses were getting out of hand, I might have re-evaluated my investment. As long as the long-term positives still apply, you should look at an earnings miss as an opportunity to add shares at a discount, not as a reason to sell.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.