The S&P 500 (INDEXSP:.INX) is now at a new all-time high. Here I want to analyze whether its a good time to sell some of the best performing S&P 500 (INDEXSP:.INX) index members. All the three companies that I am about to review operate either in the consumer discretionary space or in the information technology sector. Since the year started, cyclicals have dominated their defensive counterparts. Out of the 30 best gainers, only three stocks belonged to defensive sectors. Let’s see if you should buy, sell or hold these top performers.
Huge June out-performance
Of course, the Madison Square Garden’s spin-off, higher dividends (the yield stands at 3.15%) and more share-repurchases have also helped the stock performance but the main reason behind the share’s recent out-performance has been related to takeover rumors. Selling for 2013 9.1 times EV/EBITDA, I think the price of the shares already reflect the company’s value, hence, I would sell Cablevision at the current market price. After all, the cable operator still suffers from high indebtedness (its debt is at around $10 billion) and slow growth.
Optimism imbedded into current market prices
First quarter results were proof that the stock deserved to recover. During the last quarter, cash generation was strong and the company generated $5 billion of free cash flow (FCF) in the first half of its financial year 2013.
Even when the pace of cash generation improvement is not expected to continue (given that much of the benefit came from a re-leveling of working capital) I think full year FCF of $8 billion is reasonable figure. On the other hand, with Hewlett continuing to eliminate operating company debt, there is scope for a return to more robust capital distributions (buybacks and dividends).
Trading at 2013 7 times P/E, I think there is more compelling alternatives within Hewlett Packard’s sector. I would sell the shares at current market prices.
Stunning operating results
Micron Technology, Inc. (NASDAQ:MU) is incredibly well positioned for the future since supply and demand in memory continue to support higher prices, demand drivers in DRAM are stronger than expected for both smartphones and gaming, a product refresh from Apple Inc. (NASDAQ:AAPL) (the world’s largest consumer of NAND) is coming soon and its ability to deleverage the balance sheet as FCF growth continues.
Trading at 2014 8 times P/E, I think Micron still has a wonderful upside potential.
Foolish bottom line
Clearly, past results are not always a great proxy for future results. When analyzing stocks that have out-performed the market strongly, you should forget about performance and focus on fundamentals. High M&A probabilities can, of course, be an exception to simple fundamentals since high M&A probabilities do justify a generous valuation. Looking at fundamentals and M&A probabilities, I would sell Cablevision and Hewlett Packard while buying more Micron shares.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article S&P 500’s Top 3 Performers: Is it Time to Sell? originally appeared on Fool.com is written by Federico Zaldua.
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