When to sell 'expensive' growth stocks when the business is doing great

G

Ghost of Cutten

I thought I'd put a question out to ETers - do you have any ideas or proven methods for when to sell excellent growth businesses? So far my method was to sell half once they are no longer cheap, and the other half once they appear expensive. But especially in 2010, this has been shown to miss out on massive potential gains later on. I also had a similar experience in the 2004-2007 period - nice gains, but could have been much bigger if I had held longer. And it's not just bubble gains either - several of these types of stocks have justified their previously 'expensive' valuation by blowing away earnings estimates. And I don't want to just take a perma-bull buy and hold approach regardless of valuation - because valuation does matter ultimately.

I'm talking about stocks like CMG, NFLX, BIDU, and so on. Back in late 08 and early to mid 2009, these were at attractive valuations e.g. moderate PEs, with excellent long-term growth prospects, strong balance sheets and cashflow etc. Now they are very highly valued - 45, 70, and 83 times earnings respectively. How high a valuation can be rationally justified for the disciplined growth investor, before he MUST sell even the most attractive growth businesses?

Any suggestions for how to hold on longer, whilst still retaining risk control and a sell discipline?
 
How high a valuation can be rationally justified for the disciplined growth investor, before he MUST sell even the most attractive growth businesses?

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I'm sure you're looking for a number but someone (institional, etc) is going to be first to leave the table, you might want to be the second.

I just view the situation: long term holders as a group, one will leave and another will take his place, the dynamics change, everyone is wary of the new guy.
 
Quote from Ghost of Cutten:

I thought I'd put a question out to ETers - do you have any ideas or proven methods for when to sell excellent growth businesses? So far my method was to sell half once they are no longer cheap, and the other half once they appear expensive. But especially in 2010, this has been shown to miss out on massive potential gains later on. I also had a similar experience in the 2004-2007 period - nice gains, but could have been much bigger if I had held longer. And it's not just bubble gains either - several of these types of stocks have justified their previously 'expensive' valuation by blowing away earnings estimates. And I don't want to just take a perma-bull buy and hold approach regardless of valuation - because valuation does matter ultimately.

I'm talking about stocks like CMG, NFLX, BIDU, and so on. Back in late 08 and early to mid 2009, these were at attractive valuations e.g. moderate PEs, with excellent long-term growth prospects, strong balance sheets and cashflow etc. Now they are very highly valued - 45, 70, and 83 times earnings respectively. How high a valuation can be rationally justified for the disciplined growth investor, before he MUST sell even the most attractive growth businesses?

Any suggestions for how to hold on longer, whilst still retaining risk control and a sell discipline?
More...

what works for me is to scale out in thirds or fourths. i've scaled 2/3 of my biggest winner, and 3/4 on another one ( bought one in fall 2008 when the sky was falling and the other in summer 2009). i feel good holding the remaining positions for a long time, but at this point the most I will let them retrace would be about 50% back to my entry price (or to a support area near that level), I will either sell the remaining chunks at that point, or hold for possible higher gains. i'm playing with the house's money and pulled cash out of them, so i'm not worried about it either way.
 
You could always hold a quarter of the position and put a trailing stop of like 25% or whatever you deem is the better % number. Ie if a stock is curently 40 dollars, set a $10 trailing stop and don't touch it. I'm sure its easier said then done.
 
all these stocks are great companies. however, they ALL/ALWAYS fall. when the market is done with them,they are done. stocks are like clothing,they are in style for a while and then no one wants them anymore and they wind up on a discount rack and still can't be sold.
i think AAPL has more juice in it. i think BIDU as well but both need to pull back alot.
another one on a pull back is FFIV.
 
I admire those that can hold a position and reap the rewards of a longer term position- I don't have that tenacity, and am struggling with how best to react to 401k long term funds that i feel i need to be prepared to change . I don't think of any Fund as a long term hold anymore- What I suggest for you to consider is a preliminary approach that I am considering with my funds.

As price uptrends, and then retraces:
When that occurs, there's an opportunity to sell, and repurchase lower for more shares. if that's one's intention and still believes the longer term story.
As a previous poster mentioned -Moving averages-Perhaps the answer is as simple as that-

I would say multiple moving averages give a good graphic visual representation of what price is doing for the long term holder- It's easy to spot when a stock is basing, trending, and decling -or perhaps initially rolling over. All stocks will eventually "roll-over" and decline.

I believe one could establish a set of relatively simple trading rules around a longer term approach - using a weekly chart, multiple ema's, and a stop-loss and re-entry level if price action warrants it.

In it's simplest form, moving averages gradually separate from one another as they go higher (and lower), giving a good visual picture. As the ma's come close together, price is basing and in a consolidation.
Once the faster ema actually turns lower and crosses the next lower ema, price can be considered as potentially starting to downtrend. This does not occur frequently on a weekly chart.

Price will close below the fast ema first, causing it to turn down and change direction.

Why not make a Rule: Sell if the fast ema closes below the slower ema? Repurchase if price closes above a fast ema that is higher than the next ema (uptrend resumes)

Notice how wide the ema's are going into Dec 2010?
Eventually, price returns to the mean. Those dots are parabolic Sar and can be applied as a measure to trail stops- eventually they close on price action, -
If you are way up in a position, and feel price is extended, this may be a measure to apply that allows you to capture a greater portion of the gain , leave less on the table, and give a method that suggests a reentry.
Again, this is a suggestion that you may or may not wish to adapt, or modify-
Good luck and congratulations - Keep the gains!
SD
<a href="http://photobucket.com" target="_blank"><img src="http://i368.photobucket.com/albums/oo126/sowterdad/CMGWEEKLYDEC2010.gif" border="0" alt="CMG WEEKLY"></a>
 
I tried fundamental trades for the same reason I bought them. If earnings estimates keep beating, and the growth continues, and out looks keep improving, I hold. I sell when these fundamentals change.


The best red flag is when analyst lower their estimates just a few days before an earnings announcement.
 
I thought I'd put a question out to ETers - do you have any ideas or proven methods for when to sell excellent growth businesses? So far my method was to sell half once they are no longer cheap, and the other half once they appear expensive. But especially in 2010, this has been shown to miss out on massive potential gains later on. Some techniques will be given to you to grow the business.
 
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