Believe it or not, holding a stock with massive 100%- plus gain creates something of a problem.
Now I admit that talking about a stock that has doubled may seem like a crazy topic in this market – especially given the wall of worries facing the global economy.
But here's the thing: even though Private Briefing is only a year old, three of our recommendations have already doubled in price – or more.
These big gainers include:
- Galapagos NV (PINK ADR: GLPYY): This company was our very first pick on our very first day of publication. Since then the shares of this Belgium-based baby biotech have risen as much as 133%.
- NQ Mobile Inc. (NYSE ADR: NQ): Shares of this cybersecurity play soared as much as 146% after we recommended it in our "Five Stocks for 2012" special report, before they settled back.
- And Pharmacyclics Inc. (Nasdaq: PCYC): Shares of this cancer-treatment biotech have zoomed as much as 148% (including 111% in only 90 days after we picked it as one of our favorite biotech plays). And Wall Street brokerages are only now sliding up their target prices to even higher levels.
Now clearly, this is a great "predicament" to be in. Even still, it begs the question: "What should I do when one of my stocks doubles in price?"
Because when you factor in how quickly those gains came, it's hard to balance the belief that additional gains are possible against the fact that you don't want to lose what you already have.
Of course, how you decide to handle a stock that has doubled in price will very much depend on such factors as:
- How much you've made. (Did you make more, less or precisely what you expected on this investment? Is it a dividend stock, or was it more of a speculative play that you invested in purely in pursuit of capital gains?)
- How this position fits in with the rest of your holdings. (Has the growth in this stock caused it to become an inordinately large percentage of your holdings? Do you have too many stocks that are in similar businesses or that face similar risks? If so, you might want to pare this position.
- Your tolerance for risk. (Are you really bothered by the whipsawing moves the market seems to make with increasing frequency, or are you truly able to embrace a long-term view?) If every little move the market makes ties you up in knots, you're better off doing whatever you can to alleviate risk – giving yourself peace of mind in the process.
- Your overall investment goals.
These are topics we talk about a lot here at Money Map Press, and in Private Briefing. And all of our experts agree that – when deciding what to do with a stock that's gone up 100% or more – you really have four options.
- If you've doubled your money, the strategy that our experts prefer to recommend is what they refer to as a "free trade." You sell half of your holdings – which covers your original investment – and then let the rest ride. Because your costs are covered, what remains is pure profit – hence the "free trade." And because your costs are covered, you no longer have to worry about "trailing stops" on this particular investment position.
- You can cash out, bank the profit and look for the next opportunity to come along. This obviously prevents you from benefitting from any additional gains. But it also eliminates any downside risk on the position. And, hey, who can criticize someone who was smart enough to double their money?
- You can let your entire position ride, but protect your downside with the use of a "trailing stop" or the purchase of "put options." The put options, a form of "insurance," can be cumbersome and expensive to maintain, especially if you end up holding the position for a long time. We're big advocates of "trailing stops" as a risk-management tool. However, with a stock that's doubled, you have to be willing to be completely cashed out if the stock hits your "stop," meaning you won't participate in any subsequent gains, should the stock later resume its run.
- Or you can let your entire investment ride, without any kind of hedging or "insurance" whatsoever. From a downside standpoint, this is the riskiest move of the four strategies we've outlined here. Given that fact, we don't recommend it.
Clearly, deciding what to do with a stock that's doubled in price requires considerable thought.
But it's a nice "problem" to have.
The good news is that it's a problem that Private Briefing subscribers have faced on a fairly regular basis since we launched this service back on Aug. 11, 2011.
So far, our "reader-comes-first" focus has helped over 14,000 individuals learn more about the markets and make big gains along the way.
In fact, I recently discovered a micro-cap tech play that's projected to jump by a staggering 295%.
Why? It's a blockbuster new technology that injects and retrieves chemotherapy drugs directly from cancer cells in the liver.
This is a huge market that could not only save lots of lives but could leave you wondering what to do with the profits. You can go here now to get the full story.
If you do, we'll do our best to keep "problems" like this coming your way.
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.