When is it time to dump a Stock? An overview of WheelieDealer’s Sell Triggers - Part 2 of 3

Hopefully this Blog can flow sweetly, but I am a bit worried because I am starting it off just after I shoved a Chicken Pie and Chips in the oven - so I will be rudely interrupted in about 25 minutes and probably have totally lost my flow when I write the remnants of this with a full belly and after culinary distractions. I am not sure if these are ideal conditions to be producing a good Blog in - we will find out soon enough…….

This is the second part of my ‘Mini Series’ on what kind of situations make me Sell a stock I hold. Part 1 was focussed on my Income Portfolio and Unit Trusts - this one concerns my usual Trading ISA (including Spreadbets) where I am much more active (think Snail like trading as opposed to Glacial !!). Oh, by the way, I have written some text on Example Unit Trust Portfolios - expect this very soon.

The Mini Series has grown a little - it was going to be 2 bits but now it will be 3.

As a General Point, once I have made a Decision to Sell a Stock (various Triggers are discussed below and in Part 3 of this Mini Series), I then look to time the actual Selling Trade of the Stock as well as I can. To do this, I use the same Technical Analysis techniques that I use for Buying - these were outlined in my 6 Part Blogs on “OPAY Technical Analysis”. These are things like Candlestick Patterns, RSI, MACD, Moving Averages, Momentum, Bollinger Bands, Trend Channels, etc.

A General List of the kind of situations that make me Sell follows:

Valuation
Probably one of the most important drivers for me to Sell a Stock is Valuation - by this, I really mean p/e Ratio - and obviously this is linked to PEG (Price Earnings Ratio divided by EPS Growth Rate) and, to a lesser extent, Dividend Yield.

For things that are valued with regard to Net Asset Value (NAV), such as Property Companies (Real Estate Investment Companies REITS) and Investment Trusts - if the Share Price reaches a Premium to NAV or the Discount to NAV becomes quite small, I might sell.

If the p/e of a stock I hold starts to get up around 20 on a Forward Basis (18 ish starts getting me jittery), then I will start thinking hard about whether or not I should sell. You may have seen me mention this before, but every night after the Market has closed, I ‘plonk’ through the Charts of each of my stocks on ShareScope and while I am doing this, I am quite often ‘flicking’ across to the Details page which has information on the Earnings Forecasts for the next couple of years usually. 

Whilst doing this process, I tend to write Text Boxes on the first Graphs screen for a given Stock and I put a sensible Target into the Box. These give me a good steer with regard to when I should be thinking of Selling as they are staring me in the face.

When I first buy a stock, I always have a good idea of a Target in mind (I think this is vital - no one should ever buy a Stock without having a good idea of a Target in my view) and I write this down in the Spreadsheet that I use to record the details of all my Trades. I suspect most of you reading this will do a similar thing with a Spreadsheet - if you do not put Targets in at present, it might be worth thinking about it.

These Targets are usually based on a sensible appraisal of Fundamentals and realistic p/e multiplies to apply if the Stock does well. If you have read any of my Stock Buy Rationale Blogs, then you should have a feel of how I tend to set Targets using p/e‘s and Consensus Forecast Earnings. In addition, I normally use Technical Charting Levels to decide on Targets. For instance, I currently hold Easyjet (EZJ) and it has been going rather well since I bought a chunky slug of them. I have a good idea of a Fundamentals based Target Price which happens to coincide quite nicely with the All Time High of about 1850p ish - so it is obvious that 1850p will be Very Strong Resistance as many Investors / Traders will use this Level to sell at. 

I might well join them as I think it will be a hard level to crack - I have not totally made my mind up, but I am putting a lot of thought in as the shares are pretty close now (1761p while I am writing) and it does not do to be too greedy. I might just Top Slice the holding - maybe sell half of it. Not sure really - I do have far too many stocks so perhaps I should just ditch the lot and bank a very sweet profit…….decisions, decisions…….tough being an Investor isn’t it? This is an example of how I combine Fundamental p/e based Targets with a Technical Analysis derived Target.

A Target for me is a guide - I make the actual decision to Sell the lot or just Top Slice over a period of time. For instance, with EZJ we are still some way off my Target, but I am clearly already thinking about it - and I have been for many days. I try not to make rash decisions during Market Hours - part of my ‘Plonking’ though the Charts each night on ShareScope is to decide if I should Buy or Sell anything the next day. I like to make Decisions out of Market hours as the Intraday movements and shenanigans can affect my emotions and lead to bad decisions. In addition, Candle Patterns need a Full Day to allow their Power to work on a Daily Chart (it follows with their ‘Fractal’ nature that 1 hour Candles for instance, will work on a 1 hour Candles chart).

You have to be careful with using p/e based Valuation approaches - the danger is that a Stock in a Strong Uptrend (also momentum) - both in Price Chart Terms but also in an ‘Earnings Upgrades’ sense because it tends to regularly beat Expectations, can keep going up even with a high p/e. It is yet another aspect where Stockmarket Investing can be more ‘Art’ than ‘Science’. For this reason, it may be best to Topslice rather than totally sell out of great companies. When I say I sell on a p/e of 20, I mean that it gets me thinking of selling - if the stock keeps going up, I will hold on and be greedy - although I might Topslice to take a bit off the table.

Oooops, gotta dash, Chips need turning over……why can I smell burning?

Bad News
There is a school of thought that says you should always sell a stock the instant that Bad News comes out. Robbie Burns (the Naked Trader - get his book in Wheelie‘s Bookshop www.wheeliedealer2.weebly.com) very much subscribes to this view so it is hard to argue against it.

However, as per normal, life is rarely so simple. I have tried many times to follow this approach - but it seldom works. As an example, imagine you read the RNS News at 7am ish, before the market opens at 8am, and there is a Profits Warning for one of your Stocks. 

The theory says you should have your Trading Account open and ready to go as soon as the market opens. In practice, I find the Stock has probably dropped 15% or so before you even get a quote - I suspect that much of the Price Setting has already started in the Auction Period before the Market opens. So, it is quite often the case (especially on Smaller Capitalisation Stocks) that the Price sells off hugely and it actually starts getting into more of ‘Buy’ territory than ‘Sell’ territory.

I went for a few years trying to act in this way, but I found it was pointless trying. I like my sleep. I would far rather say “Bollox to it..” and have a good snooze and not bother reading the News until around 8am to 8.30am anyway. Call me lazy if you like - I am not going to argue. I didn’t give up work so I could get up early in the morning !!!  Blimey, next thing you will be expecting me to wear a Tie……..

The kind of stocks I try to invest in tend to be Financially Strong and have a good Track Record of success over many years. It is often the case that Profit Warnings are just a fact of life and can even create a buying opportunity. I prefer to ride out the losers, and I will ‘Average Down’ on them after a good while if they are clearly on the mend - this can take years however. By having a large number of stocks, the impact of any one Profit Warning is fairly limited on my overall Portfolio.

There is clearly a case for using Stoplosses (please refer to my previous Blog, ‘To Stoploss or not Stoploss, that is the Question’ for more details on my approach) but I do not use these on my ‘normal’ Stocks. However, if I was ever daft enough to buy a Small Oil or Mining Stock (or perhaps High Risk Tech or Pharma Stock), then maybe a Stoploss would be appropriate. In this case, the Stoploss would make the Selling Decision for me - if I bought the Stock and it dropped by a pre-determined Percentage, then I would sell it. I would use a ‘Trailing Stoploss’ if it happened to move nicely into Profit.

Readers may want to consider using a Trailing Stoploss method to lock in Profits on any of their Stocks - might be worth thinking about - particularly if you find you have a problem with an inability to make Selling Decisions. Most people do - you are not alone - in fact, I am in your Club as well !!

Obviously if you use a Stoploss Policy and are strict enough to enforce your own Rules, then a Stock would be Sold if a Profit Warning came out.

I just want to recount a sad Tale of Woe I had recently with Dart Group (DTG). These are the chaps who run the Jet2 Airline and associated Travel Agents and also have a Haulage Business - Fowler Welch. Anyway, apart from the Lorry bit, I think DTG is a great business and I held shares in them for many years with a nice Profit having built up. 

Then, out of the blue, about 6 months ago they issued a Profits Warning and the shares tanked and wiped out all my Profit - grrrrrrr. 

Anyway, as ever, I didn’t panic and mulled it over for a few days and decided that I never liked the Lorry bit anyway and it would be a much better plan to Switch into Easyjet (EZJ) which is what I did. Of course, give it a few months and DTG came out with good results and up go the shares - typical. Luckily EZJ has been great so I am not going to moan too much but it shows you what can happen. Some events with Stocks are just utterly unpredictable - get used to it, deal with it and create a Portfolio which protects you from such events.

Of course Bad News doesn’t necessarily mean just Profit Warnings - there can be other things as well and each has to be assessed calmly and carefully with a clear head and a robotic, objective, mindset. A particularly bad one is if you get news of Accounting Fraud at one of your stocks. If it is in just a small, sort of autonomous, Division of the Company, you might decide it is ok to hang on to the Stock but you must be careful. As a general rule, if I get this kind of news on one of my Stocks, I take the hit and get out - however painful. There really is nothing worse in my experience.

As many readers may know, I had some nasty news on a Stock I bought recently, Optimal Payments OPAY - about a week after I bought !! What a nightmare. This was where the infamous QPP had done a dodgy Director Share selling ‘Arrangement’ with Equity First Holdings. It then turned out that the CEO of OPAY had done a similar trick - doh. 

Luckily, OPAY has recovered after a terrible reaction initially and they look good value now. You will be able to see from a Blog that I did on the Friday they collapsed, that I did not see the situation as exactly the same as QPP - OPAY is clearly a good business and the Director was trying to be a bit clever - and he got bitten on the bum. So far, it appears that my decision to hold on was the right one.

By the way, the Pie was lush but the Chips were a tad crispy. Thanks for asking and your concern is appreciated.

Burp.

wd