I work hard to keep these articles interesting and enjoyable. After all, I personally read only stuff that’s one or the other, and preferably both.
But more than anything, I want these messages to be useful, which means making sure that the content will help you understand the world of equity investing, which, in turn, will help you make money.
So today, I’m featuring an actual email I received recently from a subscriber with a very specific question about how to handle three growth stocks. It has to do with selling losing growth stocks when you still believe that they can—and should—do well in the long run.
Here’s the whole email.
Paul,
You said in the video to get rid of all losers. Should this include companies I really believe in and expect to come back? The companies I wonder about are FireEye, SolarCity and Twitter. With SolarCity, should I wait for the merger with TSLA, which should raise the price significantly?
Before I could answer the question, I had to ask for the prices at which these stock were bought. Here’s that information. FireEye (FEYE) was bought at 37.9, SolarCity (SCTY) at 48.3 and Twitter (TWTR) at 48.8. As of October 26, FEYE was trading at 12.0, SCTY at 19.7 and TWTR at 17.3. So, these prices represent losses of 68.3%, 58% and 64%, respectively, in the three stocks.
My first reaction is that all three growth stocks should be sold. Immediately. As a growth investor, holding on when you have losses this large makes no sense. They should never have been allowed to get this large, but that’s a matter for future consideration; you can’t back the calendar up and sell where a stock used to be. (If you figure out how to sell a stock retroactively, give me a call, we can make a lot of money together!)
FEYE is an especially easy stock to advise selling because it has fallen through all previous resistance and it’s still in a downtrend. Here’s what FEYE’s chart looks like.
SCTY made a small recovery in September and has been trading in a tight range for more than four weeks. But the subscriber’s possible reason for holding—the impending merger of SolarCity with Tesla—isn’t going to help. Analysts have already calculated the results of the Tesla merger down to the nickel, and their best predictions of what it will mean for SCTY are already incorporated in the share price. (This is the case in almost any well-known future event that you think may affect a stock: If the event involves a company with significant analyst coverage, they have done the math on the result long before you thought of it.)
Anyway, here’s what SCTY’s chart looks like.
TWTR is a slightly different kettle of fish. The stock actually began a recovery in May, soaring from a bottom at 14 to as high as 25 in early October as investors anticipated big gains if Disney, or some other suitor, decided to take the company over. Then came a couple of disastrous days as possible buyers officially abandoned their courtship. TWTR dropped from 25 to 17 in three trading days and has been trading sideways for the last two weeks. Here’s the TWTR chart.
It’s still possible, of course, that any of these stocks could recover and start new uptrends. My subscriber “really believes in” these companies and “expects them to come back.”
And I can understand that thinking. I don’t agree, but I understand. After the second bourbon, most growth investors will admit to holding onto a stock longer than they should have. Call it conviction. Call it stubbornness. Call it wanting to be right. It happens.
At some point, however, you have to accept the lesson that the market is trying to teach you and hit the SELL button.
Why? Well even if FEYE does start a new rally, the stock will have to appreciate by a whopping 212% just to get back to where the subscriber bought it. Think about it. How likely is it that any stock you buy will more than triple in price? And given that the stock is still in a downtrend, how much higher will that breakeven point be when the stock finally hits bottom?
SCTY has an even worse breakeven point, needing to gain 245% to hit its buy price. And TWTR is the worst of all, with a whopping 282% hurdle to get over. And remember, that’s the gain necessary just to get back to even! Selling is hard. But selling is an absolute necessity. Selling growth stocks when you have a small loss, which is just part of the package for growth investors, preserves your capital. But taking a big loss undercuts the small number of big gains that you count on to make your portfolio’s gains for the year.
If you can’t keep your losses small, selling when your sell disciplines tell you to, you can’t be a growth stock investor. Well, you can, but you can’t make money doing it.
And lastly, from happily haunted Salem, Massachusetts, Happy Halloween! I hope this stern lesson in sell disciplines is the scariest thing that happens to you in this hair-raising season, and that the trick-or-treaters leave you just enough candy to satisfy your sweet tooth.
