Take Some Profits Now
Great Profits In Value Stocks
A Bargain-Priced High-Tech Stock
Searching for a topic with which to begin this column, I considered some wonderful things that have happened recently.
Government spending has been throttled (slightly) thanks to the sequester.
The American economy is growing
The housing market is healthy again.
Corporate profits are booming.
Stock buy-backs are common.
Dividend payments are mushrooming, too.
Noting this, investors have been shifting money out of safe havens and into more growth oriented stocks.
As a result, the stock market has been performing splendidly.
Furthermore, there have been some great fundamental stories in recent days.
Germany and France have a plan to deal with failing banks.
Thanks to fracking, the U.S. energy industry is thriving, helping U.S. drivers avoid high summer gasoline prices while fueling dreams of independence from OPEC.
The National Highway Traffic Safety Administration recognizes that self-driving cars are on the way—and is trying not to get in the way, fuelling dreams of the end of drunken driving deaths.
The solar power sector is thriving, fueling dreams of low-cost clean energy.
A Swiss solar-powered plane is flying across America in five long hops, carrying one passenger, fueling dreams of solar-powered everything. (As you read this, the plane is en route from Dallas to St Louis, a flight that should take about 21 hours.)
An 80-year-old man recently climbed Mt. Everest, fueling all kinds of dreams.
And my favorite stock, Tesla Motors (TSLA), has more than tripled over the past 10 weeks!
It’s hard not to feel good about that.
But then I realized, this is the kind of thinking—and the kind of feeling—that comes near market tops!
So instead of dwelling on all those wonderful stories, I’m going to do something more difficult, and say, “It’s time to take some profits.”
What you sell, of course, is up to you. If you just joined us, maybe you don’t have any profits to take. But if you’ve been reading Cabot’s advice—and following it—for months, you really should have profits, and you really should consider taking some now.
Which is not to say that I’m calling a market top. Tops take time, and good profits are still quite achievable in the latter stages. But I know this feeling, and I know what often follows it.
Speaking of taking profits, our ace value manager, Roy Ward, has been taking plenty of profits lately.
On May 20, he recommended selling Actavis, writing, “Activis (ACT) reached its Minimum Sell Price of 127.78 today. The stock was first recommended in the April 2013 Cabot Benjamin Graham Value Investor at 97.33 and has increased 31.3% during the past six weeks compared to a gain of just 7.2% for the Standard & Poor’s 500 Index. Actavis’ stock price advanced more than 4% this morning after the company announced a final agreement has been reached to acquire Warner Chilcott for $8.5 billion. The purchase will enhance Actavis’s sales and earnings during the next couple of years, but the rapid increase in the stock price is overdone. My new Min Sell Price, after factoring in the proposed acquisition, is 130.58, which adds credibility to my recommendation to sell. I advise selling your ACT shares now.
Four days before that, on May 16, he recommended selling Open Text, writing, “Open Text (OTEX) reached its Minimum Sell Price of 69.70 today. OTEX was first recommended in the October 2010 Undervalued Canadian Companies Special Feature at 46.73 and has advanced 49.2% during the past 31 months compared to a gain of 42.3% for the Standard & Poor’s 500 Index. Open Text reported disappointing first quarter results, although new products and an acquisition could lead to brighter prospects in the next several quarters. The company’s current 32.3 price-to-earnings ratio is considerably higher than the 10-year average P/E of 25.0. In addition, based on my five-year forecast EPS growth of 12.3%, the PEG ratio (P/E divided by forecast growth) of 2.63 is also too high. I advise selling your OTEX shares now.
Back on May 8, he advised selling TJX Companies, writing, “ TJX Companies (TJX) reached its Minimum Sell Price of 50.55 today. TJX was first recommended in the June 2010 Cabot Benjamin Graham Value Investor at 21.665 (adjusted for the 2 for 1 split on 2/3/12) and has soared 133% during the past 34 months compared to a gain of 51% for the Standard & Poor’s 500 Index. TJX is a very high quality company, but the current 19.0 price-to-earnings ratio is considerably higher than the 10-year average P/E of 13.5. In addition, based on my five-year forecast EPS growth of 12.6%, the PEG ratio (P/E divided by forecast growth) of 1.50 is also too high. TJX will report quarterly results on May 21. I advise selling your TJX shares now.
And back on May 3, Roy recommended selling Walt Disney, writing, “Walt Disney (DIS) reached its Minimum Sell Price of 64.26 today. Disney was first recommended in the September 2011 Cabot Benjamin Graham Value Investor at 31.04 and has soared 107% during the past 20 months compared to a gain of 40% for the Standard & Poor’s 500 Index. Disney is a very high quality company, but the current 20.3 price-to-earnings ratio is considerably higher than the 10-year average P/E of 14.7. In addition, based on my five-year forecast EPS growth of 11.1%, the PEG ratio (P/E divided by forecast growth) of 1.32 is also too high. Disney will report first quarter results on May 7. I advise selling your DIS shares now.
Those are Roy’s four most recent sales. Checking prices this morning, I see that every one of those stocks is now below where it was when Roy recommended selling. And those sell recommendations were all based on Roy’s calculations of the stocks’ fair value; there was no market timing involved.
But seeing so many stocks climb into overvalued territory in one month is just one more sign that it’s probably wise, as I said above, to take some profits here.
And then what? Roy advises his readers to put the money right back into the market, in stocks that are undervalued. And one of his recommendations looks pretty good to me on a technical basis as well. It’s Qualcomm, which was a great hot stock back in the late 1990s, and is a high-quality, dividend-paying technology stock today.
Here’s what Roy wrote recently.
“Qualcomm (QCOM) designs, manufactures and markets digital wireless telecom products and services based on Code Division Multiple Access (CDMA) technology. Products include global positioning systems (GPS) and integrated circuits and system software for wireless voice and data communications. The company also licenses many of its 5,700+ patents and intellectual property to manufacturers of wireless equipment.
“Qualcomm continues to benefit from the rapid growth of 3G (third generation or Tri-Brand 3G) wireless technologies and smartphones in the emerging markets, including China. Globally, 85% of wireless networks support 3G technologies. The next-generation super-fast 4G Long Term Evolution (LTE) technology will be quickly adopted in many parts of the world, and Qualcomm is now the leading provider of LTE technology.
“The company’s integrated circuit chipset, called Snapdragon, helps power Apple’s iPhone 5, Google’s Android-based smartphones including the popular Samsung Galaxy S III and S4, and Microsoft’s new Windows smartphones. Qualcomm’s technology is also used extensively in notebook and tablet computers. Management believes Qualcomm will continue to achieve large market share gains. Sales will likely advance 18% and EPS will climb 16% during the next 12 months. At 12.8 times my 3/31/14 EPS forecast of 4.83, QCOM shares are a bargain. The balance sheet is very solid with no debt and lots of cash to fund product research and expansion projects.”
That’s great stuff, but there’s one detail missing. That’s Roy’s Maximum Buy Price, and I strongly recommend that you not buy the stock above Roy’s Maximum Buy Price. Doing that increases your risk, and there’s no need for that when you can easily learn QCOM’s Maximum Buy Price (and those for 250 other great stocks) by subscribing to Cabot Benjamin Graham Value Investor.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory