When should you sell growth stocks so you don’t give most or all of your profits back? Consider the 2019 tale of Sleep Number (SNBR).
X
It took 38 trading days for Sleep Number to stage a darn good breakout on Valentine’s Day and rally 20% from the proper buy point. That move exuded market leadership. Then it took just seven days to give the gain back.
As hard it may be to do, it pays to curb your greed in most of your stock market winners and make a preemptive sell.
The exact sell rule? Take at least some profits when the stock rallies 20% to 25% above the breakout point. Or sell the entire stake.
The Tough Psychology Of Selling Near Highs
Selling on the way up often leads to forfeiture of further gains. When you believe you have one of those rare big market winners, you definitely want to hold as long as you can. Patience in the best stocks is the key to achieving a 200% or 2,000% gain.
But few stocks reach such fantastic gains, and selling most of your winners in the 20%-25% range and keeping losses small is savvy portfolio management. It leads to consistent long-term gains.
Soon after posting that 20% gain, Sleep Number sold off hard April 18 (1). It gapped down 18% and crashed through its 10-week moving average.
Volume rocketed more than six times its 50-day average. It eclipsed the total shares traded on the Feb. 14 breakout. The decisive break of the 50-day support level in heavy volume was a clear sell signal.
A day earlier, the Minneapolis-based firm reported a 54% jump in Q1 earnings to 80 cents a share. A 7% EPS drop in the year-ago quarter helped boost that increase. Perhaps the Street wanted to see a big increase in full-year guidance. Sleep Number kept it unchanged.
When To Sell Growth Stocks: Study A Stock’s Unique History
A stock’s long-term history can shed light on how it may act after advancing sharply in price. Sleep Number did not advance far after breaking out of a prior base. In April 2017, Sleep Number vaulted out of a big cup with handle at 26.01 and rose more than 41%. But the next two bases produced gains of just 16% (after a November 2017 breakout) and 8% (November 2018).
When the fundamentals of a market winner are less than truly stellar, take the gains and hunt for an even better CAN SLIM stock investment.
Investing With IBD Podcast: Get The Latest Episode And Subscribe For Free Today
In general, if you want to land a true market leader, demand earnings per share to rise 25% or more each quarter and sales to increase at least 20%. That’s the C in CAN SLIM, IBD’s seven-point paradigm for growth stock investing.
A version of this column was first published on May 24, 2020. Please follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, chart analysis, breakouts and sell rules.
YOU MIGHT ALSO LIKE:
Top-Notch Stock Screening, Chart Pattern Recognition, 1-On-1 Coaching In MarketSmith
Source: https://www.investors.com/how-to-invest/investors-corner/how-to-sell-growth-stocks-sell-rule-magic-small-cap-leader/?src=A00220&yptr=yahoo