Investment ideas: When is it best not to sell a stock? An equity investor offers some advice

I have noticed that many investors prefer to book profits once a stock generates a certain percentage of returns. That can be a costly mistake. If I had completely sold my shares of Chemcrux Enterprises after obtaining 100 per cent returns, then I would have missed out on 1800 per cent-plus gains afterwards. The same is true for Can Fin Homes, Caplin Point Lab, Lancer Container, and my other multibagger stocks. So, price movement should not be a deciding parameter for selling a stock. You need to forget about the current price and unrealised profit/loss while considering an exit.

Often, investors ask when they can sell a stock. I believe more than when to sell it, when not to sell is what we should have a clear idea about.

If you know someone who is in the stock market for the last few decades, you will find that at some point he had multibagger stocks like HDFC Bank, Wipro or Page Industries, but he did not hold on to those shares long enough for 50 times or 100 times profit. So, more than stock selection, a proper holding period determines multibagger returns, and for that, you must have a clear idea of when not to sell a stock. Let’s explore various conditions that are crucial for making a sell decision.

Better prospects

No matter how much the stock price has appreciated in the past, if the company has a better future outlook, then one should continue to hold the stock. My first investment in Chemcrux was back in March 2017. By 2021, the stock was showing more than ten times the returns in my portfolio. While I posted a few YouTube videos and wrote Twitter posts about Chemcrux, many investors suggested that I book profits as the stock price had already appreciated a lot. I was determined not to sell my holdings completely, only because of the planned capacity expansion that the company had been working on since 2020. Finally, in June 2022, the company released the following press note:

  . . . The expansion plan is in line with the strategy to enhance the capacities in chemistries handled and expertise. This capacity addition will cater to growing demand from existing customers and developing markets. The expansion plan is expected to be completed over a period of 15 months and would require an approximate investment up to Rs 80 crore. . .On completion of the expansion as envisaged, the capacity is likely to be doubled.  

As per the press release, the installed capacity is likely to double by September 2023. To be on the safe side, if I consider another six to 12 months for optimum utilisation of the added capacity, then the overall revenue can be expected to double during calendar year 2024. So, there is still 100 per cent revenue growth visibility over the 2022–24 period. This is why, as of 2022, although the stock has gained by around forty times from my initial investment, I still prefer to hold on to it.

Earnings expansion in a bear market

If you notice that a particular stock is experiencing consistent earnings expansion despite the overall weakness in the market, then that stock requires extra attention.

The 2018-19 period experienced a major bear phase in the small-cap index. Now, suppose, back in 2017, Mohit had invested in five different stocks and at the end of 2019, their performance was as follows:
1. Stock 1: 10 per cent gain
2. Stock 2: 5 per cent gain
3. Stock 3: 30 per cent decline
4. Stock 4: 50 per cent decline
5. Stock 5: 60 per cent decline

At this stage, due to some emergency, Mohit requires to sell some of his holdings. Now, out of these five stocks, which one should be on the priority list for selling? Most investors would think it would be prudent to sell the first and second stocks, as those would fetch Mohit nominal profits. But this would be a very costly mistake. During a bear phase (when the market is declining), a stock price can show some strength only because of earnings expansion. Due to the overall market weakness, the PE ratio experiences either contraction or consolidation. It essentially means that in the future, whenever a bull phase resumes, the PE ratio will expand, helping the stock price to offer multifold returns. Thus, a stock that witnesses moderate gain in a bear phase due to earnings expansion can be a potential multibagger in a bull market when both earnings and PE expansion will kick in.

From our example, the first and second stocks are actually potential multibaggers because, despite overall market weakness, their price has been showing some strength. Selling such stocks in a bear phase means throwing away your golden eggs.

Excerpted with permission from Multibagger Stocks: How to Multiply Wealth in the Share Market, Prasenjit Paul, Penguin.