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When to Sell Your Stocks - Views on News from Equitymaster
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The Equitymaster Research Digest

When to Sell Your Stocks
May 17, 2017

  • Richa and I recommended booking 61% and 57% profits respectively but Tanushree won't recommend selling this four-bagger!
  • To sell or not to sell frontline IT stocks? The short answer - NO
  • Sarvajeet was right. Forget about selling Inox Wind, you were better off not buying it in the first place.

Knowing when to sell is useful.

If you sell at the top of the market, you maximise your gains.

But there's a problem. There's no way to identify a top.

So, what to do?

It's simple.

I think you should forget about market tops and bottoms.

Instead, focus on a system.

A system that you're comfortable with.

A system that will tell you when to sell.

The system may not get the timing exactly right. But that's okay.

Here are some examples...

One-year price movement of Archies Ltd

I recommended Archies Ltd on 20 April 2016 in Microcap Millionaires.

It was a zero-debt company trading very cheap.

Price to sales 0.4 times, price to earnings 15.3 times, and price to book 0.7 times.

For almost one year...nothing happened.

Then the stock shot up 64% in less than two weeks.

I had a re-look at the stock.

The Microcap Millionaires system told me it was not worth holding on to.

So on 20 April 2017, I recommended Microcap Millionaires subscribers exit the stock with a gain of 57.4% in one year.

And that was that. The stock was out of Microcap Millionaires...no questions asked.

That's just how the service works. Buy low and sell high. As simple as that.

This brings me to Richa and the sell call she gave just two days back.

The Hidden Treasure That Was GMDC Ltd

Richa recommended GMDC on 15 July 2016 in Hidden Treasure.

GMDC enjoys a virtual monopoly in lignite extraction in Gujarat.

Lignite sales volumes had suffered in FY16 for multiple reasons - the slowdown in China, the commodity price crash, and cheap coal imports from Indonesia.

Richa expected the company's volumes to improve over time as the fundamentals reverted to the mean.

It was a PSU, but she didn't hold that against the company.

it was debt free, had a good working capital cycle, and paid dividends consistently.

Best of all, it was trading at a 55% discount to its five-year average price to book.

The 3.7% dividend yield was the icing on the cake.

Despite a lot of short-term volatility, the stock was up less than 10% by the end of the year.

And then came big up move. The stock was up 50% in less than six months!

It reverted to the mean well before the fundamentals did.

Did it make sense to hold on?

Mind you, Hidden Treasure in not like Microcap Millionaires. It's not about buying cheap stocks.

Hidden Treasure is about buying fundamentally strong small caps that have good growth potential and are trading at reasonable prices. The latest Hidden Treasure recommendation was released on Monday.

In fact, Richa recently released a report about the top three Hidden Treasure stocks. It's called Junior Bluechips. You can get the report here.

But this Hidden Treasure recommendation was different.

GMDC is a Benjamin Graham-type stock. It should be bought when the margin of safety is huge and sold when it is no longer cheap.

In other words, it was like a Microcap Millionaires recommendation.

In her sell note, Richa wrote...

  • Currently, it is trading at 1.1 times book value. Keeping in mind that mining is a regulated sector and that the core business remains cyclical and commoditised, the current valuations are beyond our comfort zone. In short, the stock is no longer cheap.

On 15 May 2017, Richa recommended subscribers exit the stock with a gain of 61% in just ten months.

Not bad for a boring PSU stock.

But is this the best strategy?

  • 'If the job has been done correctly when a common stock is purchased, the time to sell is - almost never.' - Philip Fisher

Warren Buffett once quoted Isaac Newton:

  • If I have seen farther than others, it is by standing on the shoulders of giants.

The giants were Benjamin Graham and Philip Fisher.

Buffett famously dumped his mentor's strategy and adopted Fisher's 'no selling' rule (for those interested, here are Philip Fisher's three reasons to sell a stock).

So, there is a way to make money without selling quickly.

Just ride the megatrends.

Tanushree knows a thing or two about that... and yes, these returns are real!


The stock is Avanti Feeds.

It was in the news recently. It's among the top multibaggers since the Modi government came to power.

Of course, it's fortunes never depended on the government.

Tanushree recommended Avanti Feeds on 18 February 2015 in The India Letter.

It was one of the first stocks she recommended subscribers to put in 100% of the money they intended to invest all at one go.

Why?

Her conviction was not just based on the megatrend story (which is at the core of The India Letter service).

Management quality and margin of safety were equally important. And besides, the sales growth was excellent.

The market agreed. The stock doubled in six months.

But Tanushree did not recommend a sell.

It makes sense to hold on to such stocks.

Tanushree has maintained a hold view for many months now.

The stock is up more than four times in the two years and three months since recommendation.

By the way, Tanushree's next The India Letter recommendation will be released today. Watch out for it.

Eventually, at some price, The India Letter subscribers will need to let go of Avanti Feeds.

But that price hasn't arrived yet.

This brings me to perhaps the most unpopular sector right now.

Every day, more news flows in about the woes of the IT sector.

As I wrote in yesterday's The 5 Minute WrapUp:

  • Automation and new digital technologies have made life tough for these firms. The backlash against outsourcing in the western world has only complicated matters.

    The transition from being IT services vendors to providing consultative solutions has proved difficult. The new digital landscape demands higher skill sets than what employees at IT firms possess.

    Retraining exercises at these firms have been on since quite some time. But many employees have found it just too difficult. As per an article in the Economic Times, out of the 4 million strong work-force in the sector, about 1.2 million are unable to upgrade their skills.

    This problem is at the core of the spate of job losses in the news recently.

    These firms are under serious margin pressure and will let go of those employees who they believe cannot make the crucial transition.

    We believe this sad state of affairs is unavoidable. It is a necessary part of the process these firms must go through if they want to remain relevant.

Indeed.

The transition is on in full swing. But not every company will be successful.

Investors need position themselves in only the best IT stocks. The ones that will make it through.

StockSelect has already recommended four of them. Three are buys at today's prices.

Tanushree has started to put together the next StockSelect recommendation. Will it be an IT stock? Watch out for it...

I'm sure there will be big gains to be made. But again, not in all IT stocks.

If you're still worried, I recommend you read this recent 5 Minute WrapUp from Tanushree.

In other news, investors in Inox Wind are heading for the hills.

The recent correction has been sharp.

But it did not surprise our fellow analyst Sarvajeet Bodas.

He called the stock a 'growth trap' in the premium edition of The 5 Minute WrapUp on 28 July 2016.

He pointed out several red flags - negative cash flow from operations, increasing receivable days, and working capital - that could add pressure going forward.

He concluded that chasing a growth story while overlooking obvious red flags is a recipe for disaster.

Read it here. I highly recommend it.

Here's how the stock has moved since then.

The 'Growth Trap': Inox Wind

Just fifteen days later, CRISIL revised their outlook for Inox Wind from stable to negative.

CRISIL repeated the same concerns Sarvajeet mentioned and added that Inox Wind is susceptible to technological changes in the wind energy sector.

Last week, Inox Wind declared its Q4FY17 result. The topline declined 45% YoY and net profit dipped 36% YoY.

Sarvajeet sees more headwinds in the offing. Do read his follow-up piece in the premium edition of yesterday's 5 Minute WrapUp.

The moral of the story: It's better to avoid buying certain 'growth stocks' than to sell them later.

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