The second sell signal to watch for is slowing profit growth. In the Microsoft (MSFT) chart above, the annual rates of profit growth are plotted along the bottom.
Notice MSFT stock did well in the first half of the chart — when profit growth averaged 42% a year. But when profit growth averaged 6% in the later half of the chart, the stock failed to advance. Instead, the smart money left the stock — and went searching for higher profit growth.
Yet, even as it was clear MSFT was no longer a growth juggernaut, many mutual funds and brokerage firms still loved the stock. Being in love with MSFT was a primary reason investors received lackluster returns during the early part of the century.
Stock growth follows profit growth. When profit growth slows, it may be wise to sell and look for a more promising investment.
