Is it Time to "Fire" Some of Your Stock Holdings?

This article published with permission from InvestmentU.com.

Have you ever been a manager or company executive and had to fire someone before?

I’ve never had to but, then again, I’ve never been in a position to, either.

If you have, however, Monster.com says it was probably due to one of the following three things:

1. That person was dishonest in some way.

2. They behaved unprofessionally.

3. They made too many mistakes.

Of course, getting caught being dishonest or unprofessional almost always merits a one-way ticket to the unemployment line.

But an employee who makes a lot of mistakes is also a big no-no. Too many is a clear sign that person is not learning from his or her errors and is more likely to be a drag on business than a boost over the long run.

It sounds harsh, but part of being a good boss entails finding out who’s not doing a good job and replacing them with people who can.

As the old saying goes, “It’s just business.”

For investors, there’s a lot you can take away from this sort of employer mentality.

You have to be the boss when it comes to your portfolio and that means being willing to sell stocks that aren’t adding to your bottom line.

How can you know whether or not it’s a good time to tighten up your trailing stops or even let go of a stock?

The easiest way… Keep a very close eye on the company’s quarterly earnings announcements.

The ultimate indicator

Think of a company that misses estimates or reports bad numbers as you would an employee who just got a poor performance review.

If an employee just had a lot of bad luck and they know what they need to improve to get back on track, you’re probably okay with keeping that person on your team.

But if an employee receives a bad performance evaluation and they are utterly clueless as to why it happened, you probably should let that person go.

Let’s take Alcoa Inc. (NYSE: AA), the largest U.S. aluminum producer, as an example.

Alcoa kicked off earnings seasons Oct. 9 and beat analyst expectations on earnings and revenue.

Yet, the company reported a net loss of $143 million, or $0.13 per share, from its third-quarter operations. That’s compared to a net loss of $2 million, or $0.00 per share, in the second quarter of 2012 and a net income of $172 million, or $0.15 per share, in the third quarter of 2011.

It’s nothing to write home about. Shares are down roughly 5% since then.

Listening to the company’s earnings call, it seems as though company executives understood that lower LME prices, exposure to Europe, less demand in China, and currency are the main culprits behind the stock’s poor numbers.

At the same time, though, they didn’t really say clearly how they might deal with any future downturns, either.

Research firm Dahlman Rose recently downgraded the stock from a buy to a hold because it expects the next quarter to be a difficult one for Alcoa.

At Chipotle Mexican Grill (NYSE: CMG), it’s an entirely different story.

In fact, not only did the company miss earnings, analysts are blasting Chipotle for not even addressing its slowing expansion, rising costs and future uncertainties during its earnings call.

After its announcement, the stock plummeted over 15%.

The blueprint

You’re not going to do well trying to predict what’s going to happen over the next three months in the stock market, or even tomorrow.

But you can use this quarter’s earnings announcements to ensure the companies you’re invested in are prepared for the road ahead.

Companies that miss earnings or report poor figures, yet otherwise seem in control of their businesses, will probably drop the least and recover the fastest over the long haul.

So get out and start listening to some of those earnings calls!

Mike Kapsch is part of the research team at InvestmentU.com. See more articles by Mike here.