Another day, another all-time high for the stock market. You’re probably wondering, with stock prices this high, is it time to sell?
Unless you have a crystal ball, you can’t time the market. So don’t try it; just stay in the market as a whole. But now is a great time to lighten up on a few stocks with poor outlooks. Here are a few stocks that have come too far, too fast.
When is it time to sell?
The one hardest investing question to answer is: when is it the right time to sell a stock? I think the right time is when the story has changed.
We can’t time the market, so just don’t worry about “froth.” Worry about fundamentals. If a company has doubled or tripled but still has a good story, it will go higher. The same is true of the opposite.
Right now the video game industry is seeing headwinds.
That may be hard to believe if you own shares of Electronic Arts Inc. (NASDAQ:EA). If you own it, and have held it all year, you’ve done better than a double already. The same is true of Activision Blizzard, Inc. (NASDAQ:ATVI), if you own shares you have to be pleased as the stock has surged near 52-week highs.
But both stocks will be subject to near-term headwinds that you should consider. First, the industry is facing a phenomenon that companies like Dreamworks Animation Skg Inc (NASDAQ:DWA) have long dealt with. Consumers trends show that customers want fewer titles and only the best and most anticipated ones. This trend means that earnings will be less predictable going forward and that costs to hire top developers will likely eat into margins. Other changes involve transitions to digital formats for gaming and changes in consoles all-together.
There are new consoles coming soon from both Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE). How will these new systems impact earnings for Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI)? If nothing else, you’d have to think some gamers will wait for the new systems and slow down on big game purchases in the interim.
These companies have had great runs. But when you look at these headwinds you have to think it may be time to take profits. Electronic Arts Inc. (NASDAQ:EA) actually saw earnings decline from 2011 to 2012, and growth is expected to decline this year for Activision Blizzard, Inc. (NASDAQ:ATVI) as well. With growth in doubt and many industry headwinds looming, you’re probably best off cashing in your gains and placing the proceeds in an index fund from here.
Jagged little pill
While a P/E ratio of 10 may not seem high, if you go by price-to-earnings growth the story looks somewhat bleak. AstraZeneca plc (ADR) (NYSE:AZN) will not be growing at 10%, it will actually see declining growth, so near-term a P/E of 10 might still be too high. When you factor in a tough European climate for pharmaceutical companies, expiring patents, and increased pressure from generics, where can the stock really go from here? It’s been a great run, but honestly the price increase has been more fitting of a small-cap growth stock.
I say consider yourself lucky, cash in your gains, and if you really like the company you can buy it after a pull-back. It’s come too far, too fast, with way too many headwinds going forward. The fundamentals are just not there.
Good companies, bad fundamentals
At the beginning of this post I recommended you not sell companies with good fundamentals. But don’t mistake good companies with good fundamentals. All three of these companies have done a lot of things right; that’s why their stocks are at 52 week highs. But their outlook going forward is much more questionable. At these prices their risks outweigh their reward.
Is it time to sell all your stocks? No. But it is time to lighten up on these individual names. Considering how far they’ve risen, and their lack of growth catalysts, the road ahead appears bumpy.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Stocks Are at All-Time Highs…Is it Time to Sell? originally appeared on Fool.com is written by Adem Tahiri.
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