How professionals decide when to buy, sell or hold stocks

Brokers usually need to make quick decisions to buy, sell, or hold stocks. There is no time to consult stock analysts, interview management or read lengthy research reports. But a quick glance at some key information can make the right decision under pressure. Suppose a company has just issued a press release about its quarterly report. Skip the filler and look for some of the key facts.

Key points

  • Look for growing sales and whether growth means longevity and one-time gains.
  • Increasing profit margins usually indicates that a company is well managed, but don’t automatically dismiss a company that has declining profit margins, because it may reflect that the company is launching new products or expanding.
  • Review quarterly and full-year guidance on future earnings, and notice how the guidance meets or falls below Wall Street’s expectations; then, look for subtleties and meanings in the language.
  • Consider whether the company’s stock repurchase plan reflects management’s confidence, or is essentially a public relations initiative designed to impress investors and Wall Street.
  • Consider a company that is developing a product designed to capture the spirit of the times or is about to launch a highly anticipated product.
  • Check the stock charts for the last year and the past five years, pay attention to seasonal changes and stock trends, and then make potential changes.

Increase sales

Check whether the company’s sales are growing, and if so, whether the sales growth is sustainable or related to a one-time event.

In addition to checking the sales figures, you must also go through the entire press release to understand management’s evaluation of the quarter. Numbers and comments can tell you whether your company has experienced growth or just got a windfall.

Generally speaking, small companies with sales between US$100 million and US$1 billion should grow by about 10% per year. Larger companies should grow at least 3% per year to arouse interest.

Finally, compare the sales growth of a company, not only compared to last year, but also compared to the previous quarter. If quarterly sales are on the rise, it is usually another good sign.

Reminders on when to buy, sell or hold

Unless more in-depth research is conducted, investors can read press releases and quarterly profit reports to learn a lot about the value of the company and whether its stock is worth buying.

Increase profit margins

A company’s profit margins usually increase or deteriorate, depending on how well it manages. If the sales line rises, but the cost rises faster, then something has happened.

This is not necessarily bad news. It may be that the company is entering a new business, launching a new product, or expanding its footprint. For example, Amazon has angered investors for years by investing heavily in warehouses from coast to coast. Infrastructure spending is finally starting to pay off.

On the other hand, this may mean that the company is doing poorly in terms of administrative expenses. Management’s discussion of quarterly results helps to assess the situation.

Guide

Many companies provide Wall Street with some kind of guidance on future earnings, and this is almost always important. The reaction of “Wall Street” to the news is equally important.

In other words, the company’s guidance for the next quarter may be better or worse than Wall Street analysts’ expectations. These expectations will push stock prices up or down, at least in the short term.

In-depth study of the psychology behind the earnings guidance, if a company raises its guidance for the current quarter, but underestimates expectations beyond this range, the stock may be sold. If a company lowers its forecast for the current quarter but raises its full-year forecast, then the stock may rise.

Based on experience, please focus on the long-term. In most cases, if Wall Street is convinced that an upward catalyst is about to emerge, it will ignore short-term stumbles.

Stock repurchase program

When a company uses cash to repurchase its own stock, this is usually a good sign that management believes the stock is undervalued. The repurchase plan may be mentioned in the company’s press release.

In other words, management may have other motivations. It may hope to reduce the total number of shares in the public domain in order to increase financial ratios or increase returns, thereby making the company more attractive to the analyst community. This may be a PR strategy that makes investors think the stock is more valuable.

The stock repurchase plan should be a sign of the coming of a better era for the company.

Usually, you want to see the total number of outstanding shares remain the same or decline, which may be the result of a repurchase program. This means that future earnings will be distributed on fewer stocks, resulting in higher earnings per share. As the number of stocks in circulation increases, the income will be divided and diluted by more investors, thereby reducing your profit potential.

New product

It is almost impossible to predict whether a new product will become a winner. But ignoring the stocks of the companies that make them is a big mistake.

New products tend to attract the most attention from consumers and investors. This usually helps to push up stock prices in the short term. The company may have spent a lot of money on R&D and promotion because it is positioned to absorb a lot of money.

Take the iPod released by Apple in 2001 as an example. Initially, some investors and analysts doubted that the company would be able to generate substantial revenue from this device.Facts have proved that the device has promoted Apple’s growth throughout the decade.

Of course, for companies that produce new products, new products are not always a cash cow, but if you get a good product as soon as possible, there will be huge profit potential.

The subtleties of language

When you read the press release, please consider your impressions of what happened this quarter. Management may talk a lot about the company’s many “opportunities” and enjoy the growth of the past. Or it may outline the many “challenges” facing the company. Management may identify potential catalysts for the business, such as new products or acquisition candidates.

In any case, the language may be as important as the earnings guidance figures.

The language used in these press releases is very deliberate. Many people in the PR and legal departments are reviewing it. An optimistic report is a particularly good sign, and a report containing silent language should be suspected.

Overly optimistic reports should also be viewed with caution. If a company fails to deliver on its previous promises or fails to meet its future expectations, no matter what the management says, the company’s stock may suffer a severe blow.

Technical index

Finally, look at the stock charts for the past year and the past five years.

Are there seasonal changes in stock prices? You may find that it often rises or falls in certain seasons.

Determine the trading trend of this stock: Is the stock trading above or below its 50-day and 200-day moving averages? Is it a sparsely traded stock, or is it trading millions of shares every day? Has the trading volume increased or decreased recently? A decrease in trading volume may indicate a decrease in interest in the stock, which may cause the stock price to fall. If the fundamentals are solid, growth is usually favorable, which means that the company has solid growth opportunities and sufficient capital.

Looking at a company, or from a 10,000-foot perspective, allows you to consider external factors that may prevent the stock boom.

10,000 feet of view

In addition to press releases, also consider the macro trends that may affect stocks. Rising interest rates, tax increases, or consumer behavior may have an impact on stocks. Other external factors, such as the industry-wide downturn, may affect the company. These considerations are as important as fundamentals and technical indicators.

For example, consider Continental Airlines in 2006. The company’s condition is quite good, but rising fuel costs and many bankruptcies in the aviation industry seem to hinder the company’s stock price. Continental Airlines expects its earnings to increase substantially next year, but the industry outlook seems bleak. Continental Airlines merged with United Airlines in 2010.

Bottom line

Out of necessity, investors and their brokers usually need to conduct dynamic analysis of the company and quickly make a decision to buy, sell or hold. Focusing on key information helps them avoid hasty decisions.

Of course, to trade or invest, you need a broker. If you haven’t already, and are considering which broker to choose, please do some research in order to find a broker that suits your needs.

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