18 Warning Signs That Tell You When To Dump A Stock

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It’s usually hard for individual investors to sell stocks in order to take profits or cut losses. There is often a haunting voice that whispers, “Not right now… maybe in a few days, maybe a couple of weeks, maybe next month.”

This is especially true of stocks owned over a longer period of time. We can become attached like old friends and are reluctant to say goodbye even if they aren’t stocks we’d be likely to jump in on today.

But there is no reason to get sentimental about your holdings. Your stocks don’t cry when you’re gone; stocks have no emotions toward us and we must remain dispassionate about them too. When it’s time to dump a stock, push the button and get rid of it—with today’s modern platforms it’s actually an amazingly quick and clean process to “execute” that sale with the ruthless, pitiless eye of a trained assassin.

Unfortunately for many investors, selling a stock is emotional not logical or analytical. Less pragmatic investors make stock-selling decisions with their sensitive feeling heart instead of their calculating, no-nonsense brain.

For example, if a stock has been falling, some want to hold on with the mushy hope of giving it a chance to recover. Or, maybe they hold on because romantic machismo won’t allow them to admit to a loss. On the other hand, if a stock has risen since they bought it, some become intoxicated by the rush of the rise and want to hold it wishing it will continue to an even higher high.

As an investor, always keep this hard truth in mind: the only way to actually make money on a stock is to sell it.

Often times selling a bad stock so you can buy a better one is the smartest play you can make. Riding up with the new stock is better than hoping to recoup losses on an older, more tired one. The key is to get out of falling stocks before they drop further. Of course we should hold onto the ones that truly have promise but the trick is to be very businesslike in our decisions about which is has promise and which needs to be jettisoned.

If you find yourself reluctant to sell a particular stock,
look in the mirror and ask yourself a few simple questions:

  • Am I attached for the wrong reason? Is it visceral? Nostalgic? Sentimental?
  • Am I refusing to admit I made a bad investment?
  • Is something irrational holding me to this stock? (I dig the CEO, use the product or like the company logo)
  • Do I find myself rationalizing or making excuses for its performance?
  • Is my holding on to this stock in any way emotional?

The hard part is to understand when to sell that stock we love. What is the right time to say goodbye? Are there signs?

How will I know?

18 Warning Signs That Tell You When To Dump A Stock

As you go through these warning signs, check off the tests that your stock does not pass. By breaking down the way you look at your stock into a list like this you should be able to take the emotion out of the decision.

This is not a short checklist you can run through in ten seconds. You will need to do some research at some reputable investment resources to get the answers you need to determine if your stock meets the checklist criteria. But we’ve done a chunk of the work for you by providing links to almost all of the information you’ll need.

Included in this report are convenient links to free investment resources to get the answers you need to determine if your stock meets the checklist criteria. For most of the links below, after you enter you symbol on our page, you will not need to enter the stock symbol again. Be sure to go through our checklist for every stock you own.

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You are able to access this resource as often as you wish simply BOOKMARK the page on your computer.

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1. When a stock’s price drops 10% to 15% from a recent high

  • Take a quick look at the past year’s chart for your stock.
  • The last price and 52-week price range are usually shown with the chart.
  • Look at the stock's recent highs and compare it to the current price.
  • If there is a 10-15% drop, the stock might not be finished falling.
  • Stock Chart

2. If some problem arises in the industry or the company

  • Has the company lost a big lawsuit?
  • Has a changing economy impacted the company’s sales?
  • Have investors decided to rotate out of the stock’s sector?
  • Check past news stories.
  • Check a one-year chart for your stock.
  • A steady drift down or a sharp drop usually spells trouble.
  • Stock Chart
  • Most online stock charts allow you to compare multiple stocks at once. Add the other companies in the sector or industry to the chart using the compare tool to look at those stock’s charts and see if those competitors show a similar pattern.
  • In the third table on this page, find other stocks in the industry
  • If the overall industry is in trouble, you should have a specific reason why your stock is exempt or else kick it to the curb before it’s too late

3. If the stock price has stagnated

  • Why not sell a stock that has flat-lines and buy something else that has greater potential?
  • Check out that stock chart again.
  • If the price is flat, you know what you might have to do.

4. The stock’s P/E is higher than others in the same industry…
And you can’t explain why it’s out of sync

  • Compare your stock’s P/E ratio to the other top stocks in the industry.
  • If your stock’s P/E is significantly higher, there better be a good reason or your stock might be on the way down.
  • Industry Stocks

5. Earnings are declining for the company or for the industry

  • Compare the actual Earnings per Share (EPS) trends from stock’s recent past.
  • Earnings History (Scroll down past the webcasts to the “Earnings Releases” section)
  • Consult that page with industry stocks again.
  • Find the table that says your company versus Industry Leaders
  • If your company is ranked in the top part of the Sector and/or Industry, great.
  • If not, look out.
  • If the sector/industry growth rates are below 10% or 12%, that too could be a sign of trouble.

6. The company has cut its dividend

  • Dividend stocks are hard to get rid of because you get a nice periodic cash gift from the company. But if the company has dropped that dividend even a few pennies then it is probably time to drop that company.
  • Look at the list of the recent dividends paid by the company.
  • Be sure to check for stock splits. It may sometimes appear that a company has reduced its dividend, but if they did a stock split, the dividend rate per share will go down but the overall dividend yield will be the same or possibly even go up.
  • Historical Dividends & Splits (dividends and splits are at the very bottom of the page)

7. A key executive leaves—and the new manager seems lost

  • If the leadership of a company can’t clearly articulate the vision for company growth and profitability, is reluctant to make needed changes, or is from a totally different industry, trouble could be brewing.
  • Keep an eye on the Company Headlines and recent news for your stocks.
  • Scan through the stories and see what you can learn.

8. The stock price falls below $10 a share

  • In general, stocks that are below $10 a share tend to drop faster, especially if they were at $50 or $100 per share a year ago.
  • Those sub-ten-dollar stocks might look nice because you can pile on the shares for a smaller investment, but stick with the higher-priced stocks if you can.

9. The company’s sales margins or return on equity lag behind
its competitors

  • Keep an eye on these important ratios.
  • Check the figures for a few other companies in the sector.
  • Compare them and see what you learn.
  • If your stock isn’t a leader in its industry, consider switching your holdings.

10. The company is about to embark on a large ‘boneheaded’ acquisition. i.e. AOL acquires Time Warner.

  • Keep watching the news for any of your stocks, good or bad, but be especially wary about bad news.
  • Often the stock will immediately drop sharply, but you can still save some cash by getting out at that point because it could keep sliding lower for weeks or months to come.

11. The company itself has been acquired and the acquisition
makes no sense

  • This is the opposite of the number 10.
  • Usually getting acquired will cause a big pop in share price.
  • You can use that as an indicator of when to take profits if you don’t think the deal makes business sense.

12. You discovered the stock sometime ago and enjoyed a nice run
but now the stock has leveled off

  • Everyone has heard about this hot new company now.
  • Where will new buyers come from to keep driving up the price?
  • Stocks are either undervalued, fairly-valued, or overvalued.
  • If your stock is overvalued why hold on for it to come back to earth?
  • If it is fairly-valued, is there a reason to hang on (like a large dividend)?

13. Key insiders in the company start to sell a huge amount of stock

  • Check the insider transaction report for a look at if the insiders have been buying or selling the stock.
  • Regular selling of smaller amounts of stock is probably not a big deal.
  • Big chunks of selling by executives are usually a bad sign if the stock just rose and they are an even worse sign if the stock just fell.
  • Insider Activity - To get insider information from this site, you will need to enter your ticker again in the Company box at the top left of the page.

14. Revisions to the company’s incentive plan—especially when
sales are slowing

  • The best place to determine this is in the supplement to the annual report.
  • This will usually show things they expect the shareholders to vote on.
  • Your antennae should always go up when management wants to revise their bonus plan after a year that the company has underperformed.
  • Look on the company’s Investor Relations website for recent annual reports.
  • Search for “AAPL Investor Relations”

15. Declining earnings growth

  • Has the company’s earnings growth has drastically slowed from the previous year?
  • EPS Growth percentage less than 20% could be cause for concern.
  • Company Financials

16. The company is burning through cash

  • On the company’s balance sheet, take a look at how the number on the “Cash & Equivalents” line changes from year to year.
  • It’s hard to fake cash in the bank.
  • When a company uses more cash than it makes, it’s just a matter of time before they close up shop.
  • Balance Sheet

17. The company is just too big sustain stellar growth

  • Once a company explodes past the ten billion sales mark, it’s hard to grow at the same pace it did in the pre-ten billion dollar years.
  • It might be time to find another rising star unless it is pretty obvious the company can hit at 15% EPS Growth.
  • It’s nice to see big increasing sales numbers, but just how far can the company go?
  • If you are looking for stock price growth, the biggest companies may not be able to give that to you.
  • If their sales fall short of last year’s (or last quarter’s), down goes the stock.
  • Income Statement

18. A strange new product

  • Look for new product announcements that just don’t make sense for the company.
  • Think Coors Rocky Mountain Spring Water or Smith & Wesson Bicycles (both are real, look ’em up)
  • Too many new product announcements could also be a danger sign that the company is just throwing stuff against the wall and seeing if anything sticks.

Conclusion

If your stock has more than a few of these warning signs you need to ask yourself why you’re holding onto the shares?

Don’t fall for the cocktail party stories about the stock that came back from the ashes—most of them are BS. For every stock that comes back there are many more that continue on their descent. People at cocktail parties rarely talk about the stocks that lost money.

Hopefully, if you absorb some of this checklist in your process of analyzing your stock holdings you will avoid the “big” losses. Although not as sexy, your stories will be about the stocks you sold before they tanked and those stories can be as sweet to brag about as the big winners.

Don’t forget… You can always sell the stock now, watch it drop then buy it back at a lower price.

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