Our clients often ask, “Why did account X sell my stock? Our last meeting with them went so well.” Generally speaking, there is one reason investors buy a stock: the assumption that its price is going up. There are, however, countless reasons why stocks are sold. Sometimes when a company’s fundamentals seem to be improving it’s not always clear why a portfolio manager might sell a particular stock. We want to shed some light on the factors that can lead to the “sell” decision via this month’s Top 10 list.
- Locking in gains. No one has ever been fired for locking in gains. Even an investor who’s held your stock for years can’t be faulted for taking some money off the table.
- Macro concerns or sector rotation. Even for a company that derives zero revenue from Europe and does not sell directly to the federal government, events like foreign debt defaults and sequestration cause fund managers to lighten up on stocks. In uncertain times, cash is king! Similarly, depending on the outlook of the firms’ economist, portfolio managers shift money between sectors, increasing and decreasing their exposure based on the economists’ suggestions. If healthcare is deemed an underperforming sector at a particular time, your stock might be caught in the sector rotation.
- Technical factors. Investors who rely on technical analysis put stock chart patterns and volume trends above all else: company fundamentals really don’t matter. For investors who buy and sell based solely on charts, selling your company’s stock is completely unrelated to your business fundamentals.
- Analyst or portfolio manager turnover. Portfolio managers have different investment criteria. An incoming portfolio manager may be averse to your company or sector and decide to sell positions in the fund he or she just inherited. Additionally, turnover at the analyst level may lead to waning internal support of your company’s stock and lead to a sell order.
- Fund outflows. Based on performance, a fund may experience a high rate of redemptions. In order to raise cash, a fund may, therefore, liquidate a number of its holdings, which could include your stock.
- Valuation out of whack. If your stock’s valuation is meaningfully above its historical range or the valuation of peer stocks, investors believe that there is increased risk that your stock’s valuation may move back towards the average of the group or that your stock price may move sideways as the fundamentals catch up to the valuation. In addition, some investors view reaching the 52-week high as a near-term “glass ceiling” and wait on the sidelines for a pull back before buying back into your company.
- Internal price target met. Many investors set a price target for each position, which they hope can be achieved over the next 12 months. If your shares rapidly appreciate and reach this objective ahead of time, they might pull the plug and look for the next investment opportunity. The buy-side gauges its investment returns on an annualized basis, so good returns over a short period of time are “home runs” when annualized.
- Your company’s story has changed. Let’s say three years ago your company was experiencing a disruption in normal business. At that time, your company might have appealed to “deep value” accounts. Since then, you have turned things around and business has begun to grow again, and your stock has done very well. Simply put, you are no longer a “deep value” company and those types of accounts will sell the stock.
- Crossing a market cap barrier. A fund’s charter often defines its investment criteria and restricts the fund to a particular market capitalization range. If your company outgrows these limitations, portfolio managers may be forced to exit their position in your company, regardless of their personal relationship with you or how much they love your story.
- Rebalancing the portfolio. If you have the good fortune of a significant increase in your share price, your company’s stock may represent a disproportionate percentage of a fund’s portfolio. If this is the case, investors will likely sell a portion of their shares to bring their position back to the desired exposure.
As you can see, there are lots of reasons investors sell stocks, many of which are not specific to your company. Our advice: don’t take it personally; keep running the business and telling your story. And, in the mean time, make sure you don’t miss a future Top 10. Follow us on Twitter, subscribe here to our RSS feed, or sign up to receive our email newsletters.