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Traders work on the floor of the New York Stock Exchange. (SHANNON STAPLETON/Reuters)
Traders work on the floor of the New York Stock Exchange. (SHANNON STAPLETON/Reuters)

NUMBER CRUNCHER

The hardest call: Knowing when to sell Add to ...

Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. michael@wickhaminvestments.com

What are we looking for?

There are many reasons to consider selling a stock. Perhaps the share price is growing faster than the earnings growth. Maybe the markets are rallying while your stock is lagging.

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In today’s screen my colleague Allan Meyer and I look at a “sell” signal that investors can use to possibly increase the rate of return on their portfolios. It consists of marrying two independent indicators of rough times ahead.

The screen

We looked at Canadian companies over $1-billion in market capitalization. All of these companies have reported earnings within the last six weeks.

We then examined each stock’s QEM (quarterly earnings momentum), a measure of how much its earnings per share have grown, in percentage terms, since the previous quarter. To make the accompanying list, a company must have reported earnings that were 7 per cent or more below the previous quarter’s earnings. We then turned to QER (quarterly earnings revision), which is based on analysts’ consensus estimates for the next quarter. To make the list, analysts’ estimates for the stock’s earnings had to be at least 15 per cent lower than they were a quarter earlier.

What did we find?

For many investors, buying a stock is much easier than deciding when to sell it. Putting two “sell” signals together can make the job easier. A QEM below 7 per cent and a QER below 15 per cent are each “sell” signals on their own. We found 29 stocks that exhibit both signals. Equities like this often go on to below-average performance.

Remember, though, that this relationship is not ironclad. While it's true generally, some firms may provide pleasant surprises. Before deciding to sell, you should conduct your own research or speak to an investment professional.

 

Quarterly earnings momentum and revision screen

Company Ticker Market
Cap
($-mil)
Recent
Price $
Goldcorp Inc. G-T 26,157 31.55
Barrick Gold ABX-T 20,633 19.96
Teck Resources-B TCK.B-T 15,683 26.28
First Quantum FM-T 10,847 17.70
Silver Wheaton SLW-T 10,097 27.68
Yamana Gold YRI-T 9,207 11.81
Intact Financial IFC-T 8,201 61.99
Inter Pipeline-A IPL.UN-T 6,618 23.50
Pacific Rubiales PRE-T 6,270 19.14
SNC-Lavalin SNC-T 6,012 39.76

Source: Bloomberg, Wickham Investment Counsel Inc.

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