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.
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.
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.