Exit Strategy

Now that we have learned to analyze cyclical stocks and supposedly we might invest. But in stock investing, it is vital to have an exit strategy. So, let us elaborate on this topic.

What is the best time to book profits?

By now, you must have realized the importance of timing entry and exits in cyclical stocks. It is not plausible to make money in these stocks by holding them forever. One must exit the investment when the cycle turns against you. Emotional baggage should not influence your buy/sell decisions. Excluding the peak of the cycle, one must also sell a cyclical if:

1)The sector/stock has been hit by a regulatory issue
2) Cost of production is rising faster than Revenue
3) Negative operating cash flows during periods of stellar earnings
4) Existing capacity is insufficient to meet demand and the company has announced additional CAPEX plans
5) There is a buildup in inventories signaling lower prices and lower production in forthcoming quarters

Always be a little skeptical and interpret management commentary during bull markets with a pinch of salt. As the wise men say,

Enjoy the party while it lasts but stay close to the door!

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