According to my time-tested indicators, the market is very, very overvalued right now. That is not to suggest that a large or sharp correction is imminent, but certainly there is little doubt that, with prices as high as they are, a little bad news or some collective profit-taking by mutual and hedge funds could cause a reset of at least 3%-5%.
If you have followed my column that was formerly on Morningstar.com, as value vultures, we were engaged in buying stocks of companies that would benefit from the calamities in the market which had found themselves wedged in the circumstances of fear and credit crunches.
If you are holding Panera Bread (PNRA) 93%, P.F. Changs (PFCB) 39%, AutoZone (AZO) – 123%, now is a good time to be taking profit from your investments. None pay a good enough dividend to outstrip their growth in share price. AutoZone, had you bought alongside me, was up 138% from the original purchase. It may do better, but if there is a correction, it may fall off of its highs, and, if the car market continues to recover, may level out earnings off of the blazing pace of the last few years. Also going into the sunset are Arcelor Mittal (MT) and Cimarex Energy, which faces a price to cost crunch in the near future but was up 212% from our original point of entry, is trading near the top of its range, and whose .3 dividend is not worth waiting around for.
I also sold Ecolab (ECL) after a nice 34% turnaound on it, and Disney (DIS) 18.74% as they both were double-digit profits and both would be negatively impacted by even modest dings to the recovery.
Which brings up a good explanation of when to sell. The Value investor’s timing is usually when the market is peaking and you want to lock in profits or when one sees less forward growth in a stock, and the dividend payout is small enough that slower growth, or possibly either a market correction or correction in the stock for some bit of bad news, would unwind days weeks or years of the investment’s gains.
This is definitely a time to SELL what won’t go through another dip or two. If it doesn’t look good for the next 12-18 months, and you’re making good money today, out the door it goes.
More about what to do with cash from your gains in another blog.
The Genius Guide to Value Investing 