When and why to sell off a stock

By: Aman Dhall, TNN

People love to buy, hate to be sold. Indeed, selling is an art. Ask an investor who regularly dabbles in the stock market.

Chances are that he will probably give a 15-minute talk on the subject and you may come back impressed by his sheer knowledge and experience, but with little learning.

That's because you may not exactly remember why you sold a particular stock at any point in time. Probably, it could be experience, gut feeling or simply a better understanding of the dynamics of the stock market which helped you plan your exit.

Here're seven reasons that help you bid adieu to a stock in your portfolio.

1.Consistent under-performance

If the company has reported poor results in the previous two-three quarters and the stock price has not shown any upward trend, analysts recommend you should exit a stock.

Hemang Jani, senior vice-president , Sharekhan, cites a case study of the mid-cap stocks in the recent stockmarket fall during the first quarter of 2008.

"They faired badly and were not able to perform even in the pull back rallies," he explains.

2.Over valuation

You should closely look at valuation while selling a stock.

Many a time, it happens that valuation is on the higher side of the range which is not supported by visibility of earnings and ownership.

Analysts cite the example of small realty players, which they feel, are over-valued and will find it difficult to execute bigger projects as they may fail to raise working capital.

3.Rising input cost

Analysts say you should closely monitor raw material costs of the companies in which you have shares.

For instance, in case of auto and capital goods sector, the prices of major raw materials such as metals and alloys have gone up but the price of finished products can't be increased in the same proportion because of intense competition in the sector.

"This is the main culprit behind the recent fall in the stock prices of auto sector and capital goods companies," says Jani.

4.Costly acquisition

Any value destructive acquisition, according to analysts, can lead to a three-four quarter effect on the stock price of a company.

Thus, you should look to exit the stock for time being.

Tata Motors stock is a classic example. Since March 26, 2008, the day when Tata Motors signed an agreement to buy brands — Land Rover and Jaguar — the stock has lost more than one-fourth of its value on the bourses till June 12, 2008.

5.Global market conditions

Analysts say you should also keep a check on the global cues, especially if the company shares have a majority of the sales overseas or its performance is linked to smooth functioning of operations in a foreign country.

"A case in point is IT companies, which were exposed to US operations , and were subsequently left high and dry on Dalal Street. Auto majors involved in exports too suffered," says Jani.

6.Passive management

Keeping a close eye on the management practices may provide you the cue for a planned exit.

Analyst feel that sometimes it so happens that the management turns selfish and is involved in unfair practices such as regular insider trading and exorbitant compensation.

"You must always review the depth in the management from time to time," says Jignesh Shah, head of equity, private banking, ABN Amro Bank

7.Financial model

Analysts point out that you should evaluate the financial model of a company on a quarterly basis .

It will serve not only as a guide to the current performance of the company, but also what its future goals are and how is it working towards it.

"You must assess the fundamentals of a company to set yourself new targets and re-adjust the asset allocation from time to time," says Shah.