InvestorPlace – Stock Market News, Stock Advice & Trading Tips
In most of my Market 360 articles, I talk about how to find great buys in the market. But today, I want to discuss how to tell when it’s the right time to sell.
In order to find great stocks, I assess the company’s fundamentals — eight specific factors, to be exact — and the money flow into the stock. When those tides begin to turn, they become signals to sell, rather than buy.
But those signals are not always clear.
I analyze data on almost 5,000 stocks every week, focusing on these eight fundamental factors. I based my “Moneyball” system on the same idea.
Take Power Integrations, Inc. (NASDAQ:POWI) for example.
Back in mid-March, I added Power Integrations to my Breakthrough Stocks Buy List, given its strong forecasted earnings and sales growth.
Power Integrations is a leading provider of integrated circuits (ICs) for more energy-efficient AC-DC power supplies, as well as offers ICs that are powering the switch to LED lighting. The company also supplies gate drivers that are utilized by solar and wind energy systems, electric transportation and industrial motors.
Power Integrations has benefited from the move to more energy efficient forms of electricity. Not only has the company been awarded the ENERGY STAR, it’s also been named as a Top 20 Sustainable Stock twice and received the Star of Energy Efficiency award.
During the second quarter, Power Integrations reported earnings of $0.66 per share on $106.8 million in revenue. That represented 3.9% annual revenue growth and 17.9% annual earnings growth. Analysts were expecting earnings of $0.64 per share and revenue of $106.36 million, so POWI posted a 3.1% earnings surprise and a slight revenue surprise.
But POWI started giving off certain warning signs by September, at which point I recommended that Breakthrough Stocks subscribers sell and book a 31% gain.
The first red flag was Power Integrations earnings momentum. Overall, POWI gets a “B” for Earnings Growth in the stock-picking system I use for Breakthrough Stocks.
While POWI’s earnings did grow slightly in the second quarter, it’s not enough to see a company’s earnings grow — I also want to see them grow rapidly.
Think of this like assessing a car. Just about any car can make it to 60 miles per hour, theoretically. But not as many can make it to 60 mph smoothly … let alone as quickly as a Porsche or a Ferrari.
The same can be said of certain stocks. In the case of POWI, the analyst community has slashed its earnings forecast in half for POWI. Third-quarter earnings are now expected to decline 10.3% year-over-year to $0.35 per share.
And now, for its Earnings Momentum score POWI currently has an “F”!
Outside of the fundamentals, investors should always look at the momentum of a stock. That was the red flag that inspired me to go ahead and take profits on POWI.
With POWI’s fundamentals slipping, I waited for an opportunity to sell into strength. Whenever you can, I recommend resisting the urge to panic-sell a stock. Instead, hold out just a little longer for a good day.