How long should you hold on to a winning stock? That question is an important one -- and not just for small investors. Even big companies that invest in smaller companies must decide when to cash in their chips.
Earlier this week, British newspaper The Times reported that AstraZeneca (NASDAQ:AZN) sold its entire stake in Moderna (NASDAQ:MRNA). It's a significant story, especially since the big drugmaker ranked as the biotech's second-largest shareholder. Should other investors following AstraZeneca's lead and sell Moderna stock too?
Why AstraZeneca sold
AstraZeneca first invested in Moderna in 2013, more than five years before the biotech conducted its initial public offering (IPO). The British pharmaceutical company upped its stake in 2016 with an additional $140 million investment.
So why did AstraZeneca decide to sell its shares of Moderna? The company hasn't made any public comments about the sale. That means that we must make an educated guess as to what prompted the company to exit its long-held position in the biotech stock.
There are two most likely reasons behind AstraZeneca's decision. The company could have determined that it needed additional cash to achieve its business goals. AstraZeneca also could have concluded that Moderna's fantastic growth trajectory would taper off significantly.
The Times estimated that AstraZeneca's stake in Moderna was worth around $1.2 billion. That's a huge amount of cash that the big drugmaker could use to help finance its $39 billion acquisition of Alexion Pharmaceuticals.
It would also be understandable if AstraZeneca felt that Moderna's stock appreciation would slow. Now that the biotech has won authorizations in multiple countries for its COVID-19 vaccine, there are arguably fewer near-term catalysts for the stock.
AstraZeneca could still profit over the long run from Moderna's messenger RNA (mRNA) technology. The two companies continue to work together on a couple of clinical programs.
AZD8601 is an mRNA therapeutic candidate targeting coronary artery disease. AstraZeneca licensed the rights to the experimental therapy and is evaluating it in a phase 2 clinical study.
MEDI1191 is an mRNA immunotherapy candidate targeting solid tumors. It holds the potential to improve the ability of checkpoint inhibitors such as AstraZeneca's Imfinzi to fight cancer. AstraZeneca and Moderna will split any U.S. profits from sales of MEDI1191 equally. Moderna will receive royalties from the big pharmaceutical company for any future sales outside of the U.S.
Should you sell too?
If you currently own shares of Moderna, should you sell them too? Don't do so just because AstraZeneca did. However, the likely reasons behind AstraZeneca's decision to sell are reasonable ones for regular investors as well.
If you need money for purposes that are more important than holding onto Moderna, selling could be a smart move. If you've made big gains from your position in Moderna and have your eyes on other stocks that could be even bigger winners, taking profits off the table could make sense.
Keep in mind, though, that Moderna's remarkable run just might keep going. Oppenheimer analyst Hartaj Singh thinks that the stock could soar 75% or more over the next 12 months. He expects strong recurring sales from Moderna's COVID-19 vaccine as well as potential catalysts from its pipeline.
By the way, AstraZeneca isn't the only big drugmaker to sell its shares of Moderna. Merck exited its position in the biotech in the middle of the fourth quarter of 2020. Since then, Moderna's shares have risen close to 65%. Often, the worst mistake investors can make is to sell a winning stock too soon. Even big investors sometimes make that mistake.