So I asked John during the Q&A (after thanking him, on behalf of my stock portfolio, for going public): "How do you respond to equity analysts who say you're growing too fast? Your PE is at 45, and Coach's is 12. What do you say when they ask if this growth rate is sustainable?"
"Great question," he said. Then he squinted and asked, "Is that a Michael Kors watch?"
Yes, it was. :)
His answer to my question was that Michael Kors is filling the "white space" of accessible luxury wherever it can. They will cap the number of stores at certain number, but the company does not want to keep itself from going to places where it could succeed. They don't think about price-earnings ratios, he said; they think about where they can fill a void.
I was somewhat satisfied with his response. In particular, I was comforted that they will set some limits on the growth, but not impede it. However, given yesterday's earnings report of 70% revenue growth, I still wonder if MK is just a really hot trend that can fall out of fashion at any moment.
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This leads me to an important, but painful topic: when do you sell a stock?
I have many stories about selling stocks at the wrong time. Hopefully, I've learned my lesson and can share with you my mistakes, so you don't make them.
There are 3 main reasons to sell a stock: a change in price, a change in the company, or a change in your situation.
A change in price:
When a stock has hit your target price, it may be time to say good-bye. The target price is the share price at which you say, "There is no way this stock is going to go higher." While you can rarely ever be certain of this, it is always a good idea to have a certain target in mind. This tempers your expectations: you'll patiently wait for the price to go up and/or you'll sell at a high price instead of a low one.
You may have heard the phrase, "Buy low, sell high." It's an investing commandment that every investor sins against. TRY TO FOLLOW IT. Don't get emotionally attached to a stock and believe that if it falls and keeps falling, it will go back up. It might, but there's no way of guaranteeing, so get out while you can while it's hot.
The downside to selling high is that you may miss any additional upside, or share price increases. Well, better safe than sorry, I say. It's better to collect something than to collect losses.
A change in the company:
You'll likely want to sell a stock when the company's finances have deteriorated. If revenues and profits are falling, and expenses and debt are increasing, it does not paint a nice picture for investors.
Take Avon, for example. Although it is a classic, iconic brand, the company has not been able to perpetuate its business model (door-to-door salesladies) in the age of the Internet. This has taken a toll on Avon's revenues and profits. It has mounted up quite a bit of debt as it tries to survive. The company's stock price has reflected its troubles in recent years: even well before the 2008/09 market crash, Avon's stock traded on average between $35 and $40 per share. Now it bearly reaches $20.
In addition to slacking financial fundamentals, other reasons to consider selling a stock could be:
- The company is going in a different direction, perhaps one that doesn't make sense given what the company is good at.
- It could have gotten new leadership that doesn't inspire quite like the old leadership (I'm afraid Apple might become the next example of this).
- It has cut its dividend, which is a sign it could be going through financial trouble.
A change in your situation:
Your decision to sell a stock could come from your own situation. For example, let's say you think another company's stock is worth buying, but you can't afford to own them both. If you believe the new stock will perform better, it might be worth tossing the old one.
Also, stocks are extremely liquid, which means that they can be sold easily. So, if you need cash in pinch, you can always sell your stock without penalties. However...
The tax implications may not be worth it.
When you sell a stock at a higher price than what you paid for it, you have to pay what's called a capital gains tax, which is generally 15% of the gain. This automatically decreases the return you actually recieve. And don't forget that you have to pay commission on the sale to your broker!
Basically, selling a stock can be very expensive, so make sure you are SURE that you want to do it before you go through with it.
I bought 10 shares of Michael Kors for about $33/share on February 2, 2012, just a couple of months after it had gone public. On Valentine's Day, the price jumped to $42/share, after a great earnings report. The price lingered between $39 and $42 for a couple of weeks, and in early March, I sold all 10 shares for $43. I'd made about $100, so I was happy.
Sadly, the price kept going up, and I got antsy. So I dove back in. For $48. I could only afford 5 shares this time. So not only did I buy the shares at a much higher price, I couldn't even own anywhere near as many. :(
The upside to this story is that I still own the 5 shares, and as of yesterday, they bounced to $63/share. While I do believe Michael Kors is growing too quickly now (the PE jumped to 50 after yesterday's 70% revenue growth announcement), I believe in the long-term potential of the brand, so I plan to hold on for years to come, unless something tells me otherwise.
Ultimately, you should strive to be an "investor," or someone who holds stocks for a least a year, not a "trader," someone who holds them for less than a year. It is important to remember that value comes with time, so be patient and leave your emotions at the door.
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Next week, we'll talk diversity. A diverse world is a safe world. At least for your stock portfolio.
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