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Real Questions from Real Subscribers

Q: My favorite stock, XYZ Enterprises, posted ugly quarterly results. Should I sell it?

A: Dear Subscriber,

For this question, we used a pseudonym in place of any number of actual company names to protect the innocent. The answer to this question is always the same, and it comes in two parts.

1) Does the reason you purchased the stock still apply? If you bought XYZ because of its impressive product pipeline, attractive valuation, improving profit margins, etc., consider those factors in the wake of the quarterly report. Disappointing earnings are never good news, but neither are they a deal-breaker if the stock still displays the attributes that attracted you to it in the first place.

Of course, this scenario assumes you purchased a stock after either researching it yourself or considering the in-depth research of advisers you trust. If you bought in response to a tip from your brother-in-law or a hype-laden news story, you’re flying blind.

2) Has something fundamental changed? All companies deliver disappointing results once in a while. Your job as an investor is to consider the reasons behind a bad quarter, and whether those reasons suggest the stock’s long-term position is in jeopardy.

For example: Weather-related disruptions, the untimely loss of a customer, or production issues at a factory will usually sort themselves out over time. However, regulatory woes, competitive pressures, or a lack of new products may warrant greater concern. If you have doubts about the viability of your stock, read our analysis of the results (if we cover the company) and/or see what management has to say in the earnings release and conference call. 

Thanks for your interest,

Bob Sweet, CFA
Managing Editor, Dow Theory Forecasts

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