Bad news about a stock isn’t always a sell signal

Mining Stocks

The deal that was cobbled together in Washington to avoid America’s so-called “fiscal cliff” appears to have staved off bad news, at least temporarily. But bad news about an individual stock can crop up any time—and often with far less warning than heavily reported crises like this one. It’s always upsetting, but it’s not necessarily a calamity.

When you hear bad news about a stock you own, it’s easy to react impulsively and sell. But all investments come under a bad news cloud from time to time. If you always sell on bad news, you’ll pay lots of brokerage commissions, but you’ll never make money for yourself.

To decide when to sell on bad news, you need to develop perspective. You need to be able to tell if the company has just hit a bump in the road or if it is headed for a permanent breakdown. Here’s our advice on the good reasons to sell on bad news, and the bad reasons.

Good reasons to sell:

  • News of criminal activity: If a company is accused of underworld ties, money laundering, or even “accounting irregularities,” it’s probably a good idea to sell. Because of libel law, outsiders rarely make such accusations unless they can back them up. You may not miss much if the accusations prove unfounded. But you could lose 100% of your investment if they are true.
  • Loss of a big part of yearly sales: If a company has just one product and it proves to be dangerous, ineffective or uncompetitive, sell the stock. Don’t wait for the company to launch a new product.

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Bad reasons to sell:

  • Weak quarterly earnings report: One quarter of weak profit may simply be a normal fluctuation. By the time the news of a weak quarter comes out, it may have already had its impact on the price of the stock.
  • Strikes: A single strike rarely puts a lasting dent in a company’s profitability. However, chronic labour troubles are a bad sign and may be a good reason to sell.
  • Environmental, regulatory or anti-trust problems: These laws are complicated and constantly changing through court and bureaucratic decisions, so it’s easy for well-meaning companies to run afoul of them. Also, unethical companies sometimes raise these issues to hurt their competitors.

Knowing when to sell is the hardest part of investing. Our invariable stock market investment advice is that you’ll make your investment life easier and more profitable if you mainly choose high-quality investments with honest managers and established profit-making, reputable businesses. You can make money by holding these stocks and collecting dividends over long periods, even if you sit through lengthy price setbacks.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

When you have sold stocks based on bad news about the company, have your decisions usually been right? Have you held stocks despite a barrage of bad news and been proved right? Let us know what you think.

Comments

  • Mart Resources is a good case in point. This past week the share price fell quite dramatically based on bad news (not from the company), including pipeline downtime and the risks involved in the Nigerian oil industry, as well as much speculation and rumour on company bullboards.

    The company, however, is sitting on a substantial oil reserve and is working on positive organizational issues, including a new oil pipeline. By week’s end, cooler heads had prevailed, the scared investors had jumped ship and sold their holdings, and the stock price had recovered some of the week’s losses. The potential remains for the price to climb back to previous highs and, in all likelihood, beyond.

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