Sunday, May 9, 2010

Time your exit, in style

Timing exit from a stock is important and constant review is necessary if you want get the biggest bang for your buck. Here are a few filters that can help you time your exit.


All efforts apart, more often it is the ‘time factor' that assumes a larger influence on the end results. Be it box-office hits, musical chartbusters, best-seller books, or the teams that will make it to the IPL semi-final, the key to success depends largely on how their efforts are timed.

The same logic holds true for investments too. While most investors put in considerable effort to choose the stocks they think will be multi-baggers, it may not reap as much benefit if exits aren't timed equally well.

It is, therefore, important to know when to convert the stocks back to cash; after all, paper profits are well just paper! Here are a few filters that can help you time your exit.

Periodic review

Stock markets are going to be inundated with year-end results and annual reports from India Inc. over the next couple of months.

Use the opportunity to do a thorough reading of the financials of the companies you have put your money in. See how the numbers look when compared with earlier years and against its peers.

And since the previous fiscal year was one of struggle and challenges for most companies, do not be too happy to see companies post bumper growth and profit numbers. Give allowance for the low base of last year into your final workings.

Look beyond the numbers and see if companies would be able to better or at least sustain their growth momentum in the next fiscal. Most sectors such as metals, auto, FMCG, IT, cement, retail, and banks are likely to post stellar numbers.

However, whether they can continue to impress investors with similar set of results in FY-11 is what you need to base your decision on. For instance, while rising input costs may apply the brakes on the auto and cement space, most companies from the healthcare space may be in a position to replicate growth figures, what with the added impetus from the US Healthcare Bill.

What's the value?

Along side the financial performance and company prospects, keep tabs on the valuation metrics of your stocks. See how they stand against market valuations (Sensex or Nifty price-earnings multiples) and against its peers. While stocks with PE multiple at a discount to the market and peers may be worth remaining invested in, the final decision cannot be taken in isolation.

Compare the valuation with the company's business fundamentals and future growth potential. If growth potential does not justify the valuation, it may be time to exit your investment. For example, when the Sensex was trading at a PE of 27 times in end-2007, stocks such as Thomak Cook India and Puravankara Projects were trading much higher, at about 46 times and 60 times respectively.

Clealry earnings have not kept pace. While we do have the benefit of hindsight now, do take note that valuations cannot be ignored.

Use the same valuation yardstick even for those stocks whose PE multiples have expanded significantly in the market rally that started last year. Find out if there is adequate scope for growth in the next year also.

If the business operations and financial outlook for the company continue to be strong, it may make sense to stay invested in the stock. Otherwise, you may be better off exiting it, at least partially.

Mission accomplished?

An investment truly pays not when it soars in value after you invested in it, but when you take money off it. Remember to book profits periodically.

While it is best to let your profits expand, if market volatility gives you sleepless nights, you can consider booking partial profits on your investments.

You can do this by keeping milestone-based targeted returns and religiously booking partial profits on reaching it every time.

This will help you earn some real profits and save you from the turmoil that most investors faced when the markets crashed suddenly in 2008.

Caution on new highs

While you may cherish seeing your stock touch new highs everyday, remember it is also time to raise your guard. With the list of stocks that are at new highs increasing with each passing day, chances are that some of your stocks too may have scored well. Though each new high may tempt you to stay put in the hope of more gains, take the final call based on the valuations and future growth potential. Only if you are convinced that the stock can go higher from where it is now, stick to it. Otherwise, exit while the party is still on.

Missing an opportunity

Timing the exit from a stock is important for two reasons. One: To ensure that you aren't caught unawares when the stock price tumbles. Two: You don't miss a better pick.

So, when the stock has met its price objective and its future performance doesn't seem as promising, you should look out for newer stocks to invest in.

Remember, there isn't much place for laxity in an investor's life.

Stocks are dynamic and, therefore, constant reviewing is necessary, if you want get the biggest bang for your buck.


No comments:

Post a Comment