Should You Sell When Your CEO Leaves?

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Steve Jobs has resigned from Apple (NAS: AAPL) , the company he started back in 1976. Under his leadership, it recently reached the pinnacle of the U.S. stock market, by beating out ExxonMobil for the title of the world's most valuable company. In the wake of his shift from CEO to board chairman, many investors are wondering whether they should now sell their Apple shares. This kind of basic question faces investors all the time, and the answer usually depends on why you bought your stock in the first place.

Reassess your reasons
If you bought Apple solely because of Steve Jobs, then yes -- selling might be the right move. Investors can pin much of their hopes and expectations on a CEO. Consider J.C. Penney (NYS: JCP) , where new CEO Ron Johnson -- a veteran of Apple's successful retail efforts -- has lifted investors' spirits. Johnson has a background in traditional retailing -- and a lot riding on turning J.C. Penney around. If he can double the stock price, he stands to collect potentially hundreds of millions of dollars. Now that's incentive!

With any holding, don't sell if you maintain long-term faith in the company. When you hear bad news about any business, ask yourself whether it's temporary or permanent, and whether it's insurmountable or not. Jobs' departure may be long-term or permanent, but it's not necessarily an insurmountable problem for Apple.

Earlier this year, chipmaker Cirrus Logic (NAS: CRUS) issued an underwhelming earnings report, citing problems with a faulty chip. Many investors bailed on the stock, disappointed. But others have hung on, considering the problem temporary and fixable. Indeed, my colleague Anders Bylund recently included Cirrus Logic a group of stocks "you can't go wrong on."

Valuation matters
Before selling, be sure to consider a stock's valuation. Consider holding on to your shares if you think a stock is undervalued.

For instance, Apple's revenue has grown at a 40% annual clip over the past five years, while earnings have soared 66% annually. Yet the stock's recent price-to-earnings (P/E) ratio is only about 15, below its five-year average of 25. Its forward-looking P/E ratio is a mere 12, which is lower than that of the S&P 500, despite the overall market's much slower growth rate. This sure doesn't seem like an overvalued balloon about to pop.

The more things change...
CEO departures aren't the only big changes a company can experience. Before you sell any stock, ask yourself how much has really changed, and whether those changes are for the better. If you bought into Cisco Systems (NAS: CSCO) because of its strength in selling networking equipment to businesses, you might not have been a big fan of its attempts to address the consumer market, such as its now-discontinued Flip camera.

Berkshire Hathaway (NYS: BRK.B) shareholders may have been surprised to see Warren Buffett exchange a huge chunk of the company's cash hoard for an entire railroad, the Burlington Northern Santa Fe. Many weren't sure whether the railroad business would hurt the company's profitability. But as Buffett recently noted: "It now appears that owning this railroad will increase Berkshire's 'normal' earning power by nearly 40% pre-tax and by well over 30% after-tax. ... [It's] working out even better than I expected."

The best place
Another key consideration when we're mulling selling a stock is whether we have a much better alternative. For best results when investing, you should have your money in your best ideas.

Is Apple, or any stock you're thinking about, one of your most promising picks? You might like Apple a lot, but find Hewlett-Packard (NYS: HPQ) a better bargain. Its shares plunged on news that it may exit the PC business, but it has also just announced a new PC, and its valuations are much lower than Apple's. On the other hand, if Apple is just making you skittish and you think a utility company such as National Grid will be more stable and will let you sleep better, paying out generous dividends, then by all means move your money.

Finally, if you feel an urge to sell a stock, stop and make sure you're doing so for sound, rational reasons. Never sell a holding simply out of fear or panic, or without considering the situation carefully, from several angles.

When it comes to Apple, I'm hanging onto my shares, looking forward to the iOS platform spreading to new devices, and to excited consumers grabbing millions of new products in the years to come. I know I won't be alone.

Looking for some promising investments?Read this free reportfrom The Motley Fool to find the names of five stocks we own that you should, too.

At the time this article was published Longtime Fool contributorSelena Maranjianowns shares of Google and Apple, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Google, Cirrus Logic, Berkshire Hathaway, and Apple. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Google, Apple, Cisco Systems, National Grid, and Berkshire Hathaway, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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