Cramer Offers Tips On When To Sell A Hot Stock

When should investors part ways with a hot performing stock in their portfolio? According to CNBC's Jim Cramer, the answer is when Wall Street analysts start loving the stock as well.

It might sound confusing at first, but once low market cap and highly speculative stocks soar in value Wall Street analysts start to take notice, Cramer explained during his daily "Mad Money" show on Thursday. Once six or so analysts begin covering the company, the stock tends to "peter out" because it has now become "too big and too well known" for the strong gains to continue going up the way it has.

Once Wall Street falls in love with a stock it can become "hot" — but that isn't a good sign, Cramer continued. In fact, "hot" stocks get tapped out when new stocks under analyst coverage attracts new interest at first but doesn't last long.

"Eventually everyone who wants a piece of the stock has a piece of it," Cramer said. "When that happens, the run is over and you must ring the register and go home."

Example: Hansen Natural Company

Monster Beverage Corporation MNST was known as Hansen's Natural before it officially changed its name in 2012. Back in 2004, 2005 and part of 2006 it was one of the hottest stocks around, Cramer noted. Split-adjusted Monster's stock rose from $18 to above $200 in July of 2006 but was met with resistance along the way from many who thought the energy drink space is a "fad."

Coincidentally, Goldman Sachs begin covering Hansen in May of 2006.

"There was still some upside left after Goldman started coverage but prudence dictates we sell once the stock had four analysts on it," Cramer said. "Better to clear out early with your winnings than wait for it to fade away."

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