Elation Selling

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Includes: MSFT, TGT
by: DJ Habig

Summary

Large, rapid stock gains can trigger an irrational sale.

Occasionally, selling is a prudent option.

More often with blue-chip stocks, it's better to resist that urge.

Every now and then, I'll find myself with a stock that has experienced a rapid run up. I realize this is a good problem to have, but it spurs a reflex I equate to panic selling, called elation selling. It can be hard to argue against taking some profit when it's so satisfying to lock in gains. To take a measured approach to these situations, I ask myself a couple of questions. What exactly happened to cause this rapid rise? Is it based on speculation and rumor or actual results? Do either of these answers justify a trimming or exiting of the position?

One experience I had with a large stock run up was with American Greetings (No longer listed). I opened a small position while I believed it to be undervalued. It was a Dividend Challenger so I could collect dividends through a recovery and reevaluate the investment in a few quarters. I unexpectedly found the stock surging one day. This spike was caused by an offer to take the company private at a significantly higher share price. This was great news to me since I didn't truly expect to hold a greeting card company for 30 years.

With about a 17% gain in one day, I strongly considered selling. After doing a little more research, I found that there was a strong belief that a better offer would be made to close the deal. I decided to hold while checking for any news on a daily basis. Sure enough a second offer came in bringing another smaller bump in the stock price. At this point, I knew the rally wasn't speculative, but it certainly had the potential to abruptly reverse should this offer be withdrawn.

Partly because of that and partly because it was never meant to be a core holding for me, I decided that I should just sell so I could redeploy the capital elsewhere. This could qualify as a bit of elation selling but since the decision seemed to be on its way out of my hands, I thought it made sense. However, it did open my eyes to a situation I hadn't really considered and therefore needed to plan for.

I purchased Microsoft (NASDAQ:MSFT) during the Great Recession when headlines were calling for the death of the PC. I didn't know exactly how MSFT would perform going forward, but I recognized it was extremely undervalued. I couldn't believe a company that was so innovative and so cash-laden wouldn't be able to eventually turn things around. I followed the stock's movements as it slowly recovered with the rest of the market over the next several years. I was already sitting on a nice gain when I was completely caught off guard by a double-digit one-day rise in October 2015.

I wasn't yet following my stocks with enough diligence to know the cause of the gain, but I found out rather quickly that there had been a fantastic earnings release. While this rally was based on results and not speculation, I was up over 100% and the urge to sell was strong. One reason for hesitation was the dividend growth rate that I had personally witnessed. In less than 5 years, I had seen the dividend rise 125%, which I greatly appreciated.

A second reason for holding MSFT was my lack of a suitable tech sector replacement. Had there been an attractive investment, I may not have convinced myself to hold, but I'm very glad that I did. Since then, I've received several more increasing dividends and the stock has gained another 15%.

A very recent rally within my portfolio was caused by Target (NYSE:TGT). I'd always preferred shopping at TGT to other mass retailers, but I never realized the impressive history of the company. Next year, they will almost certainly extend their dividend growth streak to 50 years. The data breach that hit TGT did quite the number on the stock and coupled with the disastrous Canadian experiment, TGT landed right in my buy range. After some time, the company showed signs of recovery and the stock followed.

I ended up sitting on a 20% return which was better and faster than I expected, but since it was gradual, it didn't really stand out to me. TGT began to slip back down and since my initial investment wasn't very big, it seemed like a great time to add some fresh capital to the investment. The stock remained in a somewhat tight range until this past week. I knew earnings were being released so I recognized that to be the cause of the large intraday rally.

I also knew this was a result-based price surge even if part of the increase was tied to improved guidance. I don't consider increased guidance to be speculative in this case when actual earnings support it. Since I understood both of those aspects of the rally, I didn't even entertain the notion of selling. I'd like to think that had this recent run up reached even higher, I'd behave the same way. If not, I believe my guidelines would've prevented me from acting on any thoughts of cashing out.

Everyone buys stock with the hopes that the price will go up over time. When one of my stocks experiences a rapid rise, I fight against the urge of elation selling. Even among stocks I want to hold forever, the temptation to cash out and hope to buy back in lower can be real. With American Greetings, the sale of my stock was inevitable with my only decision being the timing of it.

MSFT was the closest I had come to elation selling. The stock's performance since I resisted that urge has made me quite happy. Those results may have hardened my resolve because I had no thoughts of selling during TGT's recent run up. I'm sure I haven't seen the last of rapid rallies in my portfolio, but I now feel equipped to handle them rationally. Thanks for reading.

Disclosure: I am/we are long TGT, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.