BMC Software

This is a request I received from a friend over the weekend...

I have a good amount of BMC Stock via my ESPP and I was wondering what I should use as an indicator to sell the stock. My concerns are:

1) The stock price is up near its 5 year high

2) I have netted about a 30-35% return over the past year, should i take some of my profit

3) Taxes for the ESPP, short-term cap gains, long-term cap gains, or the 2 year ESPP holding period taxes

4) Or should I just mirror what the corp officers are doing with their stock?

Thanks for the question. I have attached two charts at the bottom of BMC stock with my thoughts below and answer, but first I will comment on your 4 questions.

1) See charts below

2) The amount of profit you have in a stock honestly should never be a factor in your decision to buy more or sell more of a stock. Your return is a sunk cost; You have already committed and nothing you can do can change what has happened. A good rule of thumb is to remind yourself that everyday you own a stock you are also remaking a buy decision because every day you own a stock you have capital tied up in a security that could be used to buy something else. It is all about opportunity cost. So, although almost everyone makes their profit/loss a factor in their buy/sell decision, it really is a bad practice and should be avoided because it doesn't matter.

3) Taxes can and will play a role in profits and losses, but they should rarely play a role in buy or sell decisions. When you buy a stock you should always have a sell target predetermined. If a stock makes it to that target, it should be sold, regardless of the tax implications. I am not sure exactly what your question was speicifcally asking, but a sell decision should be made most of the time without taxes coming into play. Regardless, it sounds like you have owned the stock long enough that it would be in the lowest possible tax bracket anyway. My philosophy is if you are paying taxes then you are making money, and that is good.

4) I wrote about this in my investment philosophy. There are plenty reasons why an insider may be buying or selling a stock. Often the reasons have absolutely nothing to do with the company's expectations or performance. Another problem with following officers and directors is that the information becomes public later than when the purchases/sells actually happen...could be weeks later and in that time you could miss out on a valuable move. Many times officers are also required to make purchases on certain dates, for certain other perks such as options, or one of many other reasons. To understand potential pitfalls in following your officers you would have to do a lot of research on the public filings (10k, Def 14a, others) to try to sleuth through what reasons may be behind share purchases. Some people make money following this strategy, but there are a lot of caveats that could steer you in the wrong direction.

One other thing I would like to add is I am not a huge fan of owning a lot of (if any of) your own company's stock. If you are able to buy it at a discount or are given options or shares as reward, that is one thing, but generally speaking buying shares of your company with your own savings most likely will cause you to violate the important financial guideline of diversification. Your income, job security, livlihood, friendships, resume, and multiple other important things already depend on that job. If something were to happen to your company like a major lawsuit or economic downturn then you may be overexposed to that specific company risk (think Enron, Worldcom, etc). I would think about how much of your investments and assets are already tied up with your company before you make a decision to invest more of your future into it.

Now to your ultimate question...

I have attached two charts, one of the last 3 years and the other of the last 10 years. From a technical standpoint and on the first chart, the price is getting very close to a pretty good long term resistance zone of $37. From that perspective alone the risk/reward just isn't there since the stock is currently sitting at $35. Also the entire uptrend from October's lows will be in jeaopardy with a breach of $34 (lower support trendline). There are also a few other signs that tell me the stock is sitting at a pretty weak spot. One is it hasn't made new highs even though the markets have over the past few weeks. Also, its volume has kind of died off and the largest volume day in its history last month was a fairly big down day at a similar price point as Friday. And finally, at the bottom of the chart, the negative momentum is a pretty big sign that interest in the stock is waning.

From a longer term perspective (2nd chart), I would want to see prices breach and maintain above $37 before I look into buying again. The long term trend is intact, but the momentum has stalled out, so I would want to see that breakout as well. For now the shorter term chart trumps the longer term.

I would think about selling the stock, especially if it breaks down thru the trendline currently sitting at $34. Regardless, I do not think this stock has much chance of making and staying over $37. Another option as long as transcation costs are not too steep is to sell half now and then half if any of the other scenarios play out. That way you have peace of mind that you have at least locked in some good profits near the top. The stock is up over 50% from its lows and there will be a quick run for the exits if anything disappoints in the near future.

Let me know if you have any other questions. I hope this helps.