With the Dow Jones approaching all-time highs, it is becoming increasing difficult to find good value investments. Thus, it might be a good idea to step back and take a look at some premium selling opportunities. But don’t despair, because I also have one solid stock that can keep your money safe, yet still earn returns in the long run for those with itchy trigger fingers.
There is mounting speculation that the market’s current rally, which started in mid-November, is overdue for a short term correction. Growing pessimism about the U.S. political situation has left many investors in the lurch. Recent revised GDP numbers have Wall Street spooked.
Finally, international problems seem to be creeping into the headlines yet again. The mounting currency devaluations overseas can only spell decreased earnings for companies that conduct business internationally. From Asia to Europe governments are making a concerted effort to inflate their currency, at a level that makes Ben Bernanke look downright hawkish.
Better to sell good stocks than take big losses
For those lucky enough to have positions in the following two stocks, I would like to start by saying that this analysis is simply a valuation call. I believe the following companies are great, well-run businesses with promising products.
My main thesis is that the stock price has gone too far, too fast, given the levels of growth they have seen on the books. This is often unsustainable, and can lead to one of two different outcomes. Either the stock will become dead money for a long period while waiting for its fundamentals to catch up, or it will begin the dreaded decline into bearish territory, where speculators and traders smack the stock in every direction.
No matter how great the company, when you see a premium selling opportunity, you would be smart to at least consider whether that stock is still right for a value portfolio.
Should you put this auctioneer up for sale?
eBay Inc (NASDAQ:EBAY) is currently trading at its highest P/E in more than five years. I’m going to start with two visuals to illustrate my case. Looking at a three-year chart (Figure 1), we can see that a sharp upturn began approximately one year ago.
Since the rally started, this stock has gained almost 95%. I bring this up for two reasons. First, this is highly symptomatic of what is now a momentum trade. Long-term investors need to know that these conditions often present great selling opportunities. Consequently, when the trade ends, and the trend-line illustrated by the green line is firmly broken, history shows that things can get pretty ugly.
The second reason is that since that time, the stock has gained over 50%, but neither revenue nor profits have kept pace with that run. In fact, if we look at a revenue and earnings from years past (Figure 2), we can see little justification for such a sharp surge.
As I said earlier, I believe that eBay is a great company. However, with the introduction of momentum traders, revenue that’s not keeping pace with price, and the stock trading at five-year historic P/E highs, it might be wise to consider taking some profits.
Should you pour this beer down the drain?
Another great company that I’m sad to see put on this list is Boston Beer Co Inc (NYSE:SAM). Though Boston Beer has seen a great run lately (Figure 3), its rise wasn’t due to fundamentals, momentum traders, or earth-shattering news.
This was a good old fashioned short squeeze that caught many off guard, resulting in a spike of 40%. Since spikes of this nature are due to a temporary trading condition (in this case, an overcrowded short trade that backfired), it is always wise to consider taking profits.
This short squeeze has also left Boston Beer Co Inc (NYSE:SAM) with some highly questionable valuations. I’ve listed them in the following table (Figure 4) to convince you.