6 Key Reasons to Sell a Stock

Many investors focus most of their attention on stock selection. That’s no wonder, when media headlines are filled with the latest trends, highlighting which companies are the next big winners and which stocks still offer a chance to cash in on generous dividends. Rarely, however, does the conversation turn to selling — when should one let go of a company?

A long-term quality investor buys into high-quality businesses and holds them for years, enjoying the compounding value growth that comes with ownership. Yet, there are situations where even the best companies must be sold.

The Sifter Fund’s quality investing strategy outlines six scenarios in which we exit a position. The first five relate to changes in the underlying business, while the sixth is about the stock price — specifically, a decline in the expected earnings yield.

1. The Crumbling Fortress: A company’s business model or competitiveness deteriorates permanently

We call this scenario the Crumbling Fortress — when a previously strong and high-quality company encounters a permanent problem or fails to break away from an outdated strategy and reinvent itself. This does happen from time to time.

For example, this is precisely what we believe happened to Intel, one of our long-term holdings. Intel was the king of the semiconductor industry for decades, but it failed to update its business model, allowing competitors like TSMC and Samsung to overtake it.

The same could be said of once-renowned companies like General Electric or Nokia, although we have not held either of those in the Sifter Fund.

Sifter Fund’s core principle is to own only exceptionally strong and high-quality businesses. That’s why a Crumbling Fortress scenario is a clear sell signal for us.

We aim to anticipate future problems and are ready to sell a company immediately when it no longer meets our quality criteria. In our view, it’s not worth owning a crumbling fortress — even if it looks cheap. For this reason, we also avoid investing in companies that react at the last minute with bold, risky decisions. These rarely end well.

Interested in long-term quality investing? Download our 20-page guide: Long-term quality investing. Our guide explains how time and high-quality companies work in an investor’s favor.

2. The company’s end market growth slows significantly

When a company’s end market begins to wither, it often shows up as stagnant organic growth, with most new growth coming from acquisitions. In our view, the growth of end-market demand explains more than 60% of a company’s future success.

We held shares in Cisco Systems between 2012 and 2024. In recent years, Cisco’s organic growth had become anemic, even though other business metrics remained strong. However, in 2024, Cisco decided to spend nearly all of its cash reserves to pursue growth by acquiring Splunk Inc. for almost $30 billion.

In our opinion, this type of acquisition reflected a desperate attempt by Cisco to find new sources of growth. It violated Sifter’s investment criteria, and we ultimately sold our shares in Cisco. We reinvested the proceeds into the Norwegian company TOMRA Systems.

A declining industry and end market often leads to price competition, margin compression, or expensive acquisitions — all of which erode shareholder value.

3. Unexpected or significant changes in company leadership

Situations where a company’s top leadership changes unexpectedly can increase uncertainty and may lead us to exit the investment.

For example, Disney changed its CEO two times within three years. This does not convey a strong sense of stability or continuity within the company.

We sold our shares in Disney after the CEO changes — though the decision was also influenced by other challenges the company was facing.

Sometimes sudden leadership changes are due to health issues, misconduct, or simply more attractive opportunities being offered to the outgoing CEO. In all these cases, the company enters at least a temporary period of uncertainty, which tests the strength of its corporate culture and the resilience of its business model.

That said, this selling criterion is not as serious as a Crumbling Fortress situation or a significant slowdown in end-market growth.

4. The company is acquired or enters into a major merger

For Sifter portfolio companies, this is a relatively rare event — it has only occurred twice in the past five years.

In the summer of 2020, this situation applied to Varian Medical Systems, a company specializing in cancer treatment devices. Siemens’ subsidiary made an acquisition offer with a 25% premium. We sold our shares in Varian because we believed the newly formed entity would no longer meet Sifter’s quality criteria.

In our experience, large mergers often lead to a new corporate strategy, which can dilute the company’s focus and weaken the sharp competitive edge it previously had.

5. We find a better business to replace it

The guiding principle of managing the Sifter portfolio is to own a small group of companies (around 30) and to replace them only when we find a better or more attractively valued company.

A pure buy-and-hold strategy doesn’t work in the long run, as businesses change and it’s important to be able to switch holdings with a cool head when needed.

Our guiding principle is that it’s easier — and often wiser — to buy and hold excellent companies for the long term than to constantly switch stocks in pursuit of quick wins.

How do we find new investment opportunities?

We constantly search for new high-quality companies from a universe of over 65,000 listed businesses. Our proprietary Stocksifter method automatically filters out more than 99% of these companies, leaving around 50 potential candidates each year for deeper qualitative analysis.

In our view, there are around 150–200 truly high-quality businesses globally, but in most cases, their valuations are too high to fit the Sifter portfolio.

Each year, we invest in approximately 3–5 new companies. For example, in 2024, we made two new investments and fully exited three holdings from the portfolio.

We exited two long-term U.S. investments, Cisco and Verisign, after identifying signs of weakening end-market demand and finding the five-year return potential to be unappealing. In addition, we sold our shares in Sony Corporation because our original investment thesis did not materialize.

We replaced them with, in our view, better businesses such as TOMRA Systems and Mettler Toledo. Based on our research, both companies have strong long-term growth prospects, and their stock prices were attractive. Their return potential appeared promising.

We are able to compare and switch companies effectively because we know the relative ranking of the businesses in our portfolio and are able to evaluate them against one another.

6. The Stock Price Rises Too Much — Earnings Yield Falls

This is what we call a “Price Matters” situation — when we believe a stock price has risen too far relative to the company’s future earnings power over a five-year horizon.

For example, in December 2024, we reduced our position in TSMC, as the company’s share price had nearly doubled over the course of the year. In our view, the company’s earnings power has not increased at the same pace as the stock price.

In Sifter’s investment philosophy, the stock price plays a surprisingly small but ultimately important role. We believe it’s more important to own high-quality businesses for the long term than to try to predict short-term share price movements.

Stock prices often deviate — either above or below the true value of a business — over the short term, driven more by emotions and macroeconomic news than fundamentals. However, over the long term (five years), a company’s intrinsic value and share price tend to align more often than not.

That’s why we never set price targets for any stock — not short-term, not long-term. Instead, all companies in the Sifter Fund are ranked based on risk-adjusted earnings yield.

When a company becomes too expensive without strong justification, its stock moves onto our sell list. This way, we avoid holding overvalued businesses.

The overpriced stock is replaced with another company that has equally strong qualitative characteristics — but a clearly higher earnings yield. We update our company rankings four times per year. Based on that ranking, we make small adjustments to our portfolio. Most of the time, no changes are needed.

We also consciously avoid investing in companies whose price and earnings forecasts rely on overly optimistic growth expectations—such as multi-year projections of 30% revenue and profit growth—when those results have yet to materialize. While such companies may hold promise, we believe the risks are too high.

There’s No Room for Emotion When Selling Stocks

You shouldn’t fall in love with stocks. A frog won’t turn into a prince, no matter how much you hope and wait. If a company’s business fundamentals begin to deteriorate, the stock price will inevitably follow.

There’s no guarantee that a company will return to profitability or that its stock price will climb back to its previous highs. In fact, there’s more evidence to suggest that even the world’s best companies eventually fall behind — what was once a brilliant business may fade or disappear over time.

If you realize that your investment is going off track, sell the company. The earlier you sell, the better your outcome is likely to be.

On the other hand, if the share price of a high-quality company drops significantly, that alone is not an automatic sell signal. After a calm and thorough review, you can make a more informed decision.

That’s how we operate at Sifter. We sell when we see that a company’s business model or future earnings potential is weakening — or when we find a better opportunity. It may sound simple.

In reality, analyzing a company’s long-term earnings power is a full-time job even for professionals. But careful selection, monitoring, and timely replacement of companies pays off for long-term investors.

Santeri Korpinen
CEO