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Exit Strategy

QuestionsCategory: Exit StrategiesExit Strategy
Thomas asked 5 years ago

Recently, I’m in a dilemma and would like to seek your guidance on the following:
Lets say, I purchased a stock at an undervalued price with a 40% margin of safety…but then recently there is a hype in the counter due to its 3rd quarter results are above expectations and was already higher than last year’s revenue, net profit & operating cash flows, hence, its share price shoot up way above my own calculation of intrinsic value (which is based on its average historical PE & its PEG at the time of my calculations prior to the release of the 3rd quarter results).
So, I recalculate its intrinsic value again and this time is has changed to a higher value but the current share price is still above the recalculated intrinsic value. My question to you is that, do you still sell the stock when:

  1. The company is still fundamentally strong;
  2.  My entry price is still way below the recalculated intrinsic value; BUT
  3. Current share price is above the recalculated intrinsic value by 10%.


1 Answers
Victor Chng Staff answered 5 years ago

Hi Thomas,
Usually what I will do is to access the company currently 3rd quarter result, whether the revenue and net profit increase is due to organic growth or one time growth. If is organic growth, do you expect the growth to continue? If yes, probably it is good to keep it. If no and the possible hype may die out than you may consider closing your position. 
On the other hand, if you are positive of the company but you are affect that the hype is temporary and which may cause the share price to fall again since it is 10% above your intrinsic value. You may want to get back your initial capital first and leave your gains in the market.