How the Pros Decide When to Buy, Sell, or Hold Stock
Zero in on These Key Facts to Make a Quick Decision
By GLENN CURTIS
Updated May 13, 2019
TABLE OF CONTENTS
- Increasing Sales
- Improving Margins
- The Guidance
- Stock Buyback Programs
- New Products
- The Subtleties of Language
- Technical Indicators
- The 10,000-Foot View
- The Bottom Line
A broker often needs to make a snap decision to buy, sell, or hold a stock. There's no time to consult stock analysts, interview management, or read lengthy research reports. But a quick glance at some key information can lead to a good decision made under pressure.
Say a company just released a press release about its quarterly report. Skip over the filler and look for some of these key facts.
- Look for growing sales and whether the growth suggests longevity versus the reflection of a one-time boon.
- Improving margins is usually a sign that a company is well-managed, but don't automatically dismiss a firm with deteriorating margins, as it could reflect that the company is launching a new product or expanding.
- Take a look at the quarterly and full-year guidance on future earnings and note how that guidance meets or misses Wall Street's expectations; then, scour the language for subtleties and implications.
- Consider whether a company's stock buyback program reflects management's confidence, or is essentially a PR move to impress investors and Wall Street.
- Consider companies that are developing products that look to capture the zeitgeist, or that are about to introduce products that are highly anticipated.
- Look at the stock chart for the last year and last five years, note seasonal variations and what the stock trend is, before making a potential move.
Check to see if the company is growing its sales and, if so, whether the sales growth is sustainable or related to a one-time event.
In addition to checking the sales numbers, you'll have to skim through the entire press release in order to see what management said about the quarter. The numbers plus the comments can tell you if the company experienced growth or just got a windfall.
In general, smaller companies, those in the $100 million to $1 billion sales range, should grow more than 10% annually. Larger companies should be growing by at least 3% a year to be of interest.
Lastly, compare a company's growth in sales not only from last year but from the last quarter. If quarterly sales showed an upward trend, it's usually another good sign.
Tips For When To Buy, Sell Or Hold
Barring more in-depth research options, an investor can find out a great deal about a company's value and whether its stock is worth buying by reading press releases and quarterly profit reports.
A company's margins generally improve or deteriorate depending on how well it is managed. If the sales line is going up but costs are going up faster, something is going on there.
It's not necessarily bad news. It could be that the company is entering into a new business, launching a new product, or expanding its footprint. Amazon, for example, infuriated investors for years by investing heavily in warehouses coast-to-coast.1 That infrastructure spending finally started paying off.
On the other hand, it could mean that the company is just doing a poor job of managing its expenses. Management's discussion of the quarterly results will help you determine which it is.
Many companies offer Wall Street some sort of guidance on future earnings, and it's nearly always important. How "the Street" reacts to the news is equally important.
That is, the company's guidance for the next quarter may be better or worse than Wall Street analysts are expecting. And those expectations will move the stock price up or down, at least short-term.
Delving a bit deeper into the psychology behind earnings guidance, if a company raises its guidance for the current quarter but downplays expectations beyond that, the stock will probably sell-off. If a company reduces its estimates for the current quarter but raises its full-year estimate then the stock will probably take off.
As a rule of thumb, keep your eye on the long term. Most of the time, Wall Street will overlook a short-term stumble if it is convinced that there is an upwards catalyst on the horizon.
Stock Buyback Programs
When a company uses its cash to buy back its own stock, it's usually a good sign that management believes the stock is undervalued. Repurchase programs will probably be mentioned in the company press release.
That said, management may have other motives. It may want to reduce the total share count in the public domain in order to improve financial ratios or boost earnings, thus making the company more attractive to the analyst community. It may be a public relations ploy to get investors to think the stock is worth more.
Share repurchase programs should be a sign that better times are ahead for the company.
In general, you want to see the total number of outstanding shares staying the same or falling, perhaps as a result of a repurchase program. That means future earnings are spread across fewer shares, making earnings per share higher. As shares outstanding increases, earnings are divided among a larger pool of investors and become diluted, decreasing your potential for profit.
It's virtually impossible to predict whether a new product will be a winner or not. But it's a big mistake to overlook the stocks of the companies that make them.
New products often garner the most attention from consumers and investors. This often helps move the share price higher in the near term. And the company has probably spent a huge amount of money on R&D and promotions as it positions itself to take in a whole lot of money.
Consider, for example, Apple's release of the iPod in 2001. Initially, some investors and analysts were skeptical that the company could deliver meaningful revenues from the device.2 As it turned out, that device propelled Apple's growth throughout the decade.3
Of course, new products don't always turn out to be cash cows for the companies that produce them, but if you get in on a good one early, there's a dramatic potential for profit.
The Subtleties of Language
As you read the press release, consider your impression of what occurred in the quarter. Management might have talked up the company's many "opportunities" and relished its past growth. Or it might have outlined the many "challenges" facing the company. Management might identify potential catalysts for the business, such as new products or acquisition candidates.
In any case, that language can be as important as the earnings guidance numbers.
The language used in these press releases is very deliberate. It is reviewed by many eyes in the public relations and legal departments. An upbeat report is an especially good sign, while a report containing muted language should be viewed with suspicion.
Reports that are overly upbeat should be viewed with caution as well. If a company fails to deliver what it has previously promised or falls short of its future expectations, the stock is likely to be clobbered no matter what management says.
Finally, look at the stock chart for the last year and last five years.
Are there seasonal variations in the stock price? You may find it routinely trades higher or lower in certain seasons.
Determine the trend this stock is trading in: Is the stock trading above or below its 50-day and 200-day moving averages? Is it a thinly traded stock, or does it trade millions of shares per day? Has the volume recently increased or decreased? A decreasing volume could be a sign of less interest in the shares, which could cause a decline in the share price. Increases are generally favorable if the underlying fundamentals are solid, meaning the company has solid growth opportunities and is well-capitalized.
Taking a big picture, or 10,000-foot view of a company, allows you to consider the external factors that could keep the stock from thriving.
The 10,000-Foot View
Beyond the press release, consider the macro trends that might impact the stock. Rising interest rates, higher taxes, or consumer behavior may have an impact on the stock. Other external factors, such as an industry-wide downturn, might affect the company. These considerations can be as important as the fundamentals and technical indicators.
For example, consider Continental Airlines in 2006. The company was in fairly good shape, but higher fuel costs and a number of bankruptcies within the airline industry seemed to be holding the stock back.4 5 Continental expected to substantially grow its earnings over the next year, but the sector outlook seemed dismal.6 4 Continental merged with United Airlines in 2010.7
The Bottom Line
By necessity, investors and their brokers often need to analyze companies on the fly and make snap decisions to buy, sell, or hold. Zeroing in on the key information helps them avoid a rash decision.
Of course, to trade or invest you would need a broker. If you don't already have one and are considering which broker to choose, do some research so that you can find a broker to fit your needs.