The U.S. stock market has grown to gargantuan heights over the past nine years.
Put it this way: on March 19, 2009, the benchmark Standards & Poor’s 500 index fell to 666, a devilish number for beleaguered stock market investors. Fast-forward to present day and the S&P is approaching 2,666 — an amazing growth.
There’s really no telling what the market will do in 2018 as market gurus are mixed on whether stocks will rise or fall, although the U.S. economy is in good shape and consumer sentiment is up sharply.
[See: 7 of the Best Stocks to Buy for 2018.]
That’s all well and good, but investors can’t count on a perfect portfolio, and at the very least they should be on the lookout for individual stocks and funds that could curb portfolio performance.
What are the warning signs that you’re holding a portfolio-crimping stock or two — or more? Here are some potential red flags that could threaten to sink your market holdings in 2018:
Your investment thesis changes. Typically you have a reason or trend when you buy a company, says Chance Butler, chief investment officer at Pacific Landfall in San Tan Valley, Arizona.
“For example, if you purchase General Electric (NYSE: GE) right now, your likely thesis is that [CEO] John Flannery’s plan for the company will result in a much better share price in two years,” he says. But investors need to track those outcomes closely. “I would dump the stock if signs of a turnaround don’t appear,” Butler says.
The price momentum is sliding south. “It’s never too late to cut loose a lousy stock, because a toxic stock can always keep dropping,” says Matt Ahrens, a money manager with Integrity Advisory Group in Overland Park, Kansas.
If you’re concerned about a stock, take a look at the company’s price momentum. “If the stock price is experiencing lower highs and lower lows then it is clearly in a downtrend,” Ahrens says. “That doesn’t mean it’s a lousy stock, but it is moving against you and will likely take time to reverse that trend. A turnaround company will usually take 18 months before you see their efforts begin to pay off.”
[See: 9 of the Market’s Best Growth Stocks.]
Missed earnings. A company’s fundamentals and growth prospects are the main drivers of its valuation. “If a company misses earnings a couple of quarters in a row then keep a close eye on the situation, and specifically pay attention to the future guidance in their earnings call,” Ahrens says. “Poor guidance and poor earnings can indicate a structural issue with the company that may take time to fix.”
If the stock price of a company is dropping on stronger than average volume then be aware. “It is not necessarily a signal to sell, but it is a reason to be cautious especially if the selloff occurs before or after an earnings announcement,” Ahrens says.
Don’t panic, but keep tabs on other red flags. Picking stocks is entirely about finding gaps between price and value, says Jason Stutman, senior analyst at Angel Publishing, near Baltimore. “Consequently, just because a stock’s price is going down, doesn’t mean it’s time to sell,” Stutman says. “In fact, that’s often an opportunity to buy more of a stock, given you still believe in a company’s products and leadership.”
It’s more important to look at actual stock performance than it is price performance when you’re trimming the fat in your portfolio. “For example, if the stock’s growth rate is slowing or margins are tightening, for instance, those are red flags,” Stutman says. “Also, check out a company’s income statement, balance sheet, and pricing metrics. Maybe the company is losing money, maybe it’s running out of liquidity, or maybe share gains have wildly outpaced growth.”
All are big areas of concern.
Track your portfolio funds for underperformance, too. “When the overall markets are up 20 percent and your fund or stock is down or only up 1 to 5 percent, consider selling,” says Mark P. Cowdell, a certified financial planner at Cowdell Investments in South Jordan, Utah. “It might be that you just have a bad fund or an expansive money manager.”
[See: These 7 Funds Make You Feel Good About Investing.]
Additionally, check online mutual fund rankings to see how the fund measures up. If your fund is ranked lower than other similar available funds, make a change. “It’s never too late to sell a bad stock or fund,” he says.
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5 Signs That It’s Time to Sell a Stock or Fund originally appeared on usnews.com
