Breakfast News: Selling Is an Art. Your Art.

A quick note before we begin: Today's Breakfast News is a special edition since markets are closed for Labor Day. Regular service resumes tomorrow. Fool on!

Many Roads Lead to a Sell

Team Rule Breakers

We recently asked what your first instinct is when a stock you own doubles. Almost half of you said hold and stay the course. With CrowdStrike (NASDAQ: CRWD) we announced something in between -- that we will be selling a portion (15%) of our stake, which had grown into the largest holding in the Epic Portfolio.

Our proprietary Potential Growth Indicator sits just above 10% and keeps sliding. CrowdStrike's stock trades near 36 times forward sales (not earnings – sales!). The market has priced it for perfection, and AI cuts both ways for cybersecurity.

But we still believe in the business, and it still belongs in the portfolio (indeed, it will remain among our largest Epic Portfolio positions). We just want less of it at this price, in this market, at this size.

Tom and David Gardner gave us the cleanest sell rule in The Motley Fool Investment Guide: "When you find a better place for your money, put it there." It's a great rule. It's also one of many. An investor may wisely sell for all kinds of reasons:

• A winner grew into an uncomfortably large slice of the portfolio.
• The price outran the business, leaving no room for a stumble.
• The thesis broke. The moat, the management, or the market changed.
• The investor never understood the company well enough to hold through a 40% drawdown.
• Life needs the money: tuition, a medical emergency, a down payment, retirement income.

There are so many other reasons. Also, please notice how these reasons often have very little to do with the company. Selling is less formula than judgment. Thoughtful investors reach different judgments from identical facts.

💡 Epic Portfolio principle: Write your sell rules before you need them.

Your selling discipline has to be yours, and it should exist on paper (or screen) before you need it. In the moment, you'll be reacting to a price rather than a plan. So write down three things for every position: why you own it, what would make that reason untrue, and how large you'll let it grow. Revisit once a year.

If you do that, a "trim" alert becomes information rather than instruction. Some members will sell 15%. Some will sell none. Some will sell more. Every member's situation is different. Selling is an art – your art. The investor who knows why they're selling has already done the hard part.

Stock in Focus: CrowdStrike, of Course

CrowdStrike came into the Epic Portfolio from Team Hidden Gems, and it became our largest holding. It was also Team HG that first brought the stock to the Fooliverse, recommending it in IPO Trailblazers in 2019 at $23.41, then again in early 2020 at $15.61. Tom carried it into Stock Advisor that June at $24. (All prices are split-adjusted.) With the stock over $210 today, those calls are up 810%, 1,265%, and 788%. Take a bow, Team HG, because the company has been delivering.

What

During the recent earnings release, CEO George Kurtz called this the very best quarter in company history. Second-quarter revenue of $1.47 billion surpassed estimates by roughly $30 million, growing 26% year over year. The stock rose 20% on the strength of the report.

Like all Foolish investors, we don't just look at revenue growth. We like to see strong cash flow as well, and the company didn't disappoint. Operating cash flow increased 59% to $530.3 million, and free cash flow rose 33.1%.

Management doesn't see things slowing down, either. It raised the full-year FY2027 revenue outlook to between $5.99 billion and $6.01 billion.

So What?

CrowdStrike's Q2 results offer a compelling combination of strong top-line growth and rapidly improving cash generation, all against a backdrop of surging AI-security demand. Those cash flows will power the company forward: CrowdStrike needs to continue to invest heavily in R&D and equipment to capture the rising demand for its security technologies as AI agents do more and more work, and this quarter says it can fund that through the business rather than from shareholders.

As the "trim" alert pointed out, the stock is not cheap by any measure. Nor would we expect it to be. And as Rule Breakers, we're comfortable with that. We prefer to invest in companies like CrowdStrike with its leadership in the cybersecurity industry as well as its strong financial performance.

Now What?

Even with the recent partial sell recommendation, CrowdStrike remains a buy in every active service in which it's recommended. The Motley Fool has issued more than 100 buy recommendations for CrowdStrike in total across the years, and this quarter has borne out that conviction.

The number to watch from here isn't revenue -- it's whether cash generation keeps pace with the R&D spending that lead depends on. With the company set up to deliver more incredible performance in an industry with so much current and potential demand, we look forward to CrowdStrike setting more records down the road.

A version of this was originally sent to Epic Portfolio members on August 28 as a weekly column.

Today's Question

Tell us about a stock you sold -- and what finally triggered the decision. Would you make the same call again?

Debate with friends and family, or become a member to hear what your fellow Fools are saying!

The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy.