Sometimes you’ll get behind a small, relatively-unknown stock that gains a bunch of momentum. You won’t want to bail, but eventually you will have to. Owning small stocks that are on a tear is a good way to make money, but you need to know when to sell because, sooner or later, all hot stocks will implode.
You need to figure out when the interest in the stock has peaked, and the best way to do that is to check the analyst coverage, Cramer says. A good rule of thumb is that once a hot stock has four analysts covering it, the run is probably coming to an end.
Analyst coverage is a pretty accurate indicator of how much general awareness and interest there is in a particular stock. Hot stocks get tapped out when there’s no one left to be attracted to them; when all the people who are going to buy have already bought. And by the time that happens, you need to be out.
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