|Valuation||The Boston Beer Company|
Just a quick look at the most basic numbers leads me to believe that this stock is highly overvalued. Even on a forward-looking basis, this is still very expensive at a 29 forward P/E. Also, looking at just the most recent year, the stock has seen a 60% gain, while revenue is only growing by 7% year over year. Even if margins improve drastically, there is no way this kind of move to the upside is sustainable, given its fundamentals.
Once again, this is a fantastic company with a great product. But just as value investors seek inexpensive stocks, we must also discard expensive stocks when the opportunity arises.
Enough selling — let’s buy something
One of my favorite stocks over the last few years has been The Walt Disney Company (NYSE:DIS), because of its unique nature, smart management, solid growth, and firm dedication to future returns. Disney isn’t just about a cartoon mouse and animated movies. It’s a global media powerhouse that owns television networks ABC and ESPN. Recently, it went on a spending spree to acquire Pixar (2006), Marvel (2009), and Lucasfilm (2012), making Disney the undisputed king of fantasy.
While Disney’s stock has seen quite a run lately, up 35% in the last year alone, there still appears to be room to the upside. This is due to recent earnings out-pacing the historic averages. The average five-year EPS growth rate is 8.05%, while the average three-year is a whopping 19.58%. The most recent year booked 18.20% EPS growth rate.
A close look at several metrics (Figure 5) shows that Disney has been outperforming compared with historic averages, particularly in growth and profitability. This is quite an accomplishment given Disney’s increasing size.
|Metric||Five-Year Avg. ||Most Recent Year |
|Net Profit Growth||11.40%||13.20%|
|Return on Assets||6.50%||7.00%|
A quick note on Disney’s current yield of 1.40%: With a low payout ratio of 22%, and a renewed dedication to returning money to shareholders, this dividend will almost certainly increase. In fact, over the last two years, we have seen the dividend rise from $0.40/share in 2010, up 50% to $0.60/share in 2011. Finally in 2012 the dividend was increased another 25% to $0.75/share. Look for this to continue over the foreseeable future.
Selling at an attractive P/E of only 17, Disney represents a unique company with a solid future. Looking ahead, I’m expecting Disney to earn $3.90 for FY 2014. Applying a more realistic P/E of 18 gives a price target of $70. That’s nearly another 30% increase over current prices.
While it may be difficult to sell a great stock that has provided some fantastic returns, sometimes it must be done. If the same valuations that once told you to purchase a stock are now telling you to sell, you would be wise to at least consider this option.
Trailing stops are often useful in situations where you believe the run could continue, but want to protect your profits. I highly encourage those in such scenarios. But don’t despair, because there are always opportunities for the very astute stock picker. Sometimes, the pain of selling a winning position can be mitigated by the excitement of a new investment with better potential.
The article Market Close to All Time Highs: But Are There Still Buying Opportunities? originally appeared on Fool.com and is written by James Catlin.
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