When Should You Start Taking Profits on Your Multibagger Stocks?

In this segment from MarketFoolery, host Chris Hill, Motley Fool One's Jason Moser, and Stock Advisor Canada's Taylor Muckerman consider an individual case of a common question for investors: When you have a stock that has become a big winner, should you hold on tight until you need the money, or sell to lock in some profits, and reinvest them elsewhere? There's certainly no single right answer, but the question is always a good one to ask. The response depends on the context of the individual company, so the Fools tailor their take this time to the outlook for Sirius XM (SIRI).

A full transcript follows the video.

This video was recorded on May 14, 2018.

Chris Hill: From someone who didn't include his or her name, it was just an alphanumeric email address, so, no name attached to this email. "I purchased shares of Sirius XM starting in the early 2000s with the intention of hopefully making it my get-rich stock. Long story short, I'm up nearly 500%. The average share price for me is $1.17. Do I continue to ride it and hopefully get rich, or do I take some profit?" For context, this person's cost basis is just over $1, right now, Sirius XM trades for about $6.80 a share, somewhere in that neighborhood.

We always give the caveat, we can't give individual advice. But, I love this question because it's a question that, I think anyone who's been investing for a while hopefully gets to the point where they're asking this question. In this person's case, it's Sirius XM. Just, whatever your individual situation is, I think we all have probably gotten to that point at some point, where we're like, "OK, I've owned this thing for a while. I'm up well ahead of the market. What do I do here?"

Jason, there are certainly times when there are stocks that, the best thing you can do is just hold on to them forever. Then, there are others that you think, whether I sell out of it completely because I've found a better place for my money, or I "take a little money off the table" and use some of the earnings I've gotten and diversify into something else -- it's always a relevant question.

Jason Moser: Yeah, and I think with Sirius XM, it's even more relevant. Congratulations on the gains, it sounds like you really hit them with a high in there with over 400%. This is they hey-now thesis. This is the Howard Stern thesis, because that is really why you would buy into Sirius XM, I think, at this point in time, or if you did back in the day. There was a lot of skepticism as to whether people would actually subscribe to satellite radio. And lo and behold, there are over 30 million subscribers today.

Now, the problem is, a lot of those subscribers are there because of Howard Stern. And I understand. I'm a subscriber as well, and I mean, I really love it. The thing is, you have to be aware, at least, that in the next three years, I think, his contract comes up. He just renewed a deal for five years, and it's sounding like he's kind of wanting to ride off into the sunset after this is all said and done. So, if, in fact, that is the case, in three years he decides to call it quits, now, Sirius XM was very clever in sealing an additional seven years of all of his content in that contract. Even if he quits after three years, they get an additional seven years where they can really monetize his library of content, which is a big library. And that's great, and I think a lot of the diehards will continue to subscribe. But I know a lot of people who probably will go ahead and quit after he quits, as well. I mean, certainly, I probably will. I know some of my friends who will, too.

So, then, it's a matter of, what will Sirius XM be in three years' time, or four or five years' time? There's a lot of competition out there trying to get our ears, whether it's Spotify -- obviously, Spotify is building out their universe and adding podcasts and new shows and whatnot. So then, you look to the fundamentals of the business, and Sirius XM has done a lot, but the top line is slowing down, margins are going to continue to be pressured. It's got a big ownership there in Liberty Media, which is John Malone. I think that's probably a net win at the end of the day.

Probably one that I would lighten up on, though, a little bit. I think the market is pricing a lot of this immediate future of Howard Stern into it today, and the big unknown is what happens to that subscriber base once he takes off. I have a feeling it probably goes down, and if it does, the stock is surely to go with it.

Taylor Muckerman: Yeah, I'm of the same mind. Potential for high volatility, high debt load, and three years and then Howard Stern's gone. Definitely an unclear future for a company that's in a very competitive market.

Moser: They did just upgrade their app, though, I will say. Over the weekend, I got the new upgraded version, which throws a lot of video content into it, which is really cool. It's a really wonderful app. They've done tremendous things with it. And they have so much stuff on it! I'd probably stay on as a subscriber, but maybe not at the same price point. I think they're going to have to grapple with that a little bit in order to keep that subscriber base up and growing.

Hill: Two quick things I'll add. One is, John Malone's track record in media. John Malone is someone who sticks to his knitting. He doesn't really take the tack of, "Well, I have a good track record when it comes to managing media businesses, therefore I'm going to try restaurants." He sticks to media. The other thing is, I was just thinking as you were talking, Jason, in a way, SiriusXM was Netflix before Netflix. If you think about Netflix having all this other content that they're essentially licensing, and then they get into original content, same thing with satellite radio. Sirius XM, a lot of their stuff -- not just on the music side, but just on the talk programming side -- is licensed from other entities. But they also have the original programming with Howard Stern, and that's sort of the differentiator.

Moser: Yeah. I think we were arguing the same thing with Spotify. In order for Spotify to really be able to separate itself, they're going to have to figure out a way to grow that exclusive catalog of content. And, wow, man, there's just so much stuff out there. Just like video, there's only so much time in the day. It's difficult to attract such a wide audience.

Muckerman: Far too easy to make video and audio now.

Moser: Yeah, it really is.