What a start to 2013.
The S&P 500 gained a whopping 10% in the first quarter of the year. That’s just the thirteenth time that the index posted a gain of 10% or more.
In all but two of those years, stocks continued to post gains in the remainder of the year.
That may all be well and good, but if you are like me you might be a bit more skeptical. This year might be the exception to that history.
The market made its hay thanks to the easy money policy of the Federal Reserve and a lack of options for investors looking to take more risk.
Now that the gains have been made it makes more than just a little sense to take some money off the table. That is especially true with some of the biggest winners in the market.
Winners into losers
Nothing goes up forever. Eventually a stock will revert to its mean average returns. That means the winners in the first quarter are likely to be the losers of the second quarter.
Before that happens, consider liquidating these five stocks before it’s too late:
The higher they rise, the harder they fall. Few if any stocks gained more than Netflix (NASDAQ:NFLX) during the first quarter. The stock doubled in value during the first three months of the year, thanks to a short squeeze of epic proportion. Helping to light the fire was stronger-than-expected operating results in the fourth quarter of 2012. The real play here is with streaming video and the company appears to be delivering the goods. The trick is that there is also plenty of competition coming. With the valuation more than a tad bit excessive, taking money off the table on this one is an easy call.
If you think Wall Street is rigged, look no further than Best Buy (NYSE:BBY). The beleaguered electronics retailer is flying high in the first quarter of the year. This despite the failure of a founder bid to buy shares and a business that is clearly in decline. The current CEO certainly knows how to play the game making key cuts and decisions that on the surface have done enough to bring a series of analyst upgrades.
The question now is this: Can the numbers justify the gains? If a decline doesn’t come in the next quarter it will very likely come at some point down the road. I simply do not see how this big box retailer competes in a world of Amazon (NASDAQ:AMZN), Target (NYSE:TGT) and Wal-Mart (NYSE:WMT). It’s not going to happen.
Another player of the game is Meg Whitman at Hewlett-Packard (NYSE:HPQ). This snake-oil salesman has the world convinced that the personal computer is not dead. For their next trick, they might bring back the buggy whip. Good luck with that. Shareholders should count their blessings on this one. Lock in your profits, because the next leg is going to be lower.
Without innovation this company is dead, dead, dead. How the stock managed to be one of the top performers in the first quarter is unimaginable. Whitman earned her salary and then some, but don’t be fooled. This one is going to give up the gains and possibly more before this story ends.
If tax reform ever gains steam, you can say good-bye to the business model for H&R Block (NYSE:HRB). With the threat of tax reform hanging over the stock, it is a no-brainer to take some money off the table here. With the stock up nearly 60% in the first three months of the year, the decision is even easier.
At current prices this stock is overvalued with or without tax reform. Analysts expect profits to grow by 14% from the current fiscal year to the next. Shares trade for 17 times current fiscal year estimated earnings. There is a near-3% dividend for this stock, but a single-digit multiple of earnings is a more reasonable price to own this stock.
The market loves to give head fakes. Investors will take a stock higher only to pull the rug out from under shareholders down the road. Avon Products (NYSE:AVP) jumped in the first quarter thanks to earnings that beat expectations by a solid 37%. Prior to that report, Avon was twisting in the wind. Shares were falling steadily thanks to three straight quarters of earnings misses. This one is a classic head-fake. I’m not sure one earnings beat is worth a near 50% jump in share price.
Rebounding from poor performance is rarely that simple. Look for further setbacks before this company truly recovers. If you want to own it again, you are likely to be able to do so at a lower price in coming months.