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Your Sell Tactics: More Responses

The Year Forward P/E Trend

Price/Earnings ratios are common, but they are almost always based on trailing earnings. After all, the trailing earnings can be measured. Forward Price/Earnings ratios are based on analysts' estimates of the coming 12-month earnings ratios.

Jaime Chavez, who works at a major investment bank, sent in the forward price/earnings ratio sell tactic.  He described the technique as follows:

My favorite sell indicator also happens to by my favorite buy indicator -- it is the year-forward P/E (YFPE). It is simply the P/E on year-forward analyst estimates. The problem with P/E ratios alone is that the E usually includes extraordinary items, and thus gets distorted when you look at it historically. YFPEs, on the other hand, are quite consistent because analysts are consistently optimistic (we can always count on them giving us investors the best possible scenario).

The idea is that the current forward Price/Earnings ratio tells you the current market sentiment about the stock. When the stock is near its all time historical high for a forward P/E, it is a sell. When the stock is near its all time historical lows for a forward price/earnings ratio, it is a buy.

This quantitative approach is a contrary metric that allows you to "sell when everyone else in buying." You can also think of it as "Buy Low, Sell High," but using market valuation as the metric, not stock price.

Mr. Chavez understands that this is the principal behind the approach, as he included the following:

When you use the YFPE, you have to forget about the news affecting the stock price. Every time a stock is trading at a rich valuation, it will be surrounded by bullish news, tempting investors to buy.

T's historical forward P/E is about 25. But, whenever T reaches this price level, the stock should be sold. In July of 2000 it was near its low of 16, which would indicate a buy, using this approach.

Sell Half

This sell tactic is simply designed to make yourself more comfortable after making a sale, and it is one that this writer swears by, at least for emotional comfort. Put simply:

Whenever I am thinking about selling, I only sell half my position. That way, whatever happens, I can still feel good about it. If the stock continues to rise, I take comfort that I still hold some. If it falls, I take comfort that I took some off the table.

This "half-glass" approach requires that you be an optimist, however, as pessimists will only make themselves miserable following it.

Robert V. Green