In late 2010, you purchased the common stock of a company that has reported significant earnings increase in nearly every quarter since your purchase. The price of the stock increased from $12 a share at the time of purchase to a current level of $45. Notwithstanding the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be over-priced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing and continuing to hold the shares. You reflect on these choices as well as other actions that could be taken. Describe the various actions that you might take and their implications.
Answers & Comments
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1. In about 15 months' time, the price has gone up from $12 to $45.
2. Active investors believe in churning the portfolio, to make maximum gain. After the share has shown sufficient capital appreciation, they sell it, and buy some other stock. It also happens that the same stock comes down again. They repurchase it when so happens. By active trading, the investors, thus, increase the value of their investments.
3. In your case, it seems it will be better to book the profit. If the price comes down later, you can repurchase it. In the meantime, you can invest the money in some other scrip.
4. Analysts make forecasts based on the data available with them, and their interpretation of data. Forecasts may or may not turn out correct. In fact, analysts always add a disclaimer to their forecasts.
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