"Hey, John, how's it going?"
"Not too bad, Jim. I just bought some shares of Gump's Shrimp" (Ticker: BUBBA).
"Great! When are you going to sell it?"
That's not a question you hear every day. Yet you, as an investor, should already know the answer before you buy stock.
So, what will trigger a sale? I can think of several things. If the Securities and Exchange Commission opens an investigation, a senior officer at the company suddenly resigns, or the short percentage gets too high, I will sell. Those reasons come from an online seminar hosted by the Fool a while back called "When to Sell."
Here's another one -- when the reason for buying the stock no longer exists.
Case in point: Alderwoods Group
As of the latest reported quarter, some three years later, the company had reduced its debt from $836 million to $386 million and increased free cash flow (operating cash flow less capital expenditures) from $47 million to about $120 million annually. Meanwhile, the stock price had risen from a low of about $3 to about $17.50, near its current level. So, should I sell or not? Let's look at the pros and cons.
Reasons to hold:
- The management team that turned things around has signed a contract extension.
- The company could begin issuing a dividend using the cash flow, now that much of the debt is gone
- It's not a fast grower, but it is a good, steady business.
Reasons to sell: See above.
Let me explain. I bought this company because of the turnaround. I wanted to take advantage of the improvement as management brought the company to where it is now. I did not want to hold the stock for the long term, and I have come to the conclusion that the turnaround is essentially over.
Now, I believe Alderwoods is a great company that will continue to make money. For me, though, the reason I bought the stock in the first place no longer exists. Therefore, I sold.
To me, emotions are the biggest hurdle to overcome in becoming a successful investor. In this case, there's the trap of falling in love with the stock and ignoring why I bought in the first place. If I do that, I can justify all sorts of reasons to keep it and possibly pay the price later down the road. Instead, if you have a clear-cut list of reasons for selling the stock, then you have a better chance at ignoring the emotional whipsawing of the market. And that will lead to better long-term results.
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Fool contributor Jim Mueller hopes he will not have to use Alderwoods' services for a very long time, but even though he no longer holds a position in Alderwoods, he doesn't begrudge the company its earnings. The Motley Fool is investors writing for investors.