by Traders Reserve | December 24, 2013 8:00 am
You can find the market’s sweet spot by zeroing in on just ONE number.
That number is the P/E Gap – and it’s the one number that can tell you instantly whether your stock is a front runner for gains or a likely last-place finisher next year.
In fact, last year my “one number” approach produced an outrageous 53% return in my Sizzling Stocks portfolio. I’ve just identified my 10 Sizzling Stocks for 2014 using that same One Number approach.
What’s the P/E Gap? Simply put, the P/E Gap is the difference between a company’s P/E ratio and its expected profit growth rate.
It is the perfect expression for what professional investors are clamoring for today: growth at a discounted price. As such, owning these stocks in advance of future interest and buying provides investors an opportunity to generate market-beating performance.
The P/E Gap can also tell you what stocks to sell a portfolio, and at the moment that might be a good idea.
The Federal Reserve announced the beginning of the end of quantitative easing. That move sent stocks rocketing higher continuing a party that has accelerated in 2013.
Investors are drinking the Kool-Aid and that’s a perfect time to be thinking about what stocks we should be selling.
Irrespective of macro conditions, ultimately valuations matter and that’s why using the P/E Gap makes a ton of sense.
One of the poorest-rated stocks from my latest P/E Gap model of publicly traded companies is Eli Lilly (NYSE: LLY).
The reason Lilly is on the list should be obvious. The company is in decline – nothing serious mind you, but with patents coming off line at a rate greater than new drugs are added, profits are going to be impacted negatively in the short term.
In fact, analysts on average are expecting a big decline in Lilly’s earnings next year. Actually it’s projected as a precipitous drop from $4.14 per share this year down to $2.78 in 2014. That’s a 30%-plus decline.
Who on earth would want to own this stock?
Apparently there are plenty of willing suckers. At current prices, Eli Lilly stock trades for 18 times 2014 estimated earnings.
Good luck with that. To think Lilly trades at a price higher today than where it stood on Jan. 1, 2013, is beyond amazing.
What was the lure? If valuation wasn’t compelling there had to be some other reason investors bought Eli Lilly stock this year. The answer is dividends.
Fearful investors were buying high-paying dividend stocks over the year as fear of a market or economic collapse gripped many market participants. Lilly’s 4% dividend would attract plenty of buyers this past year.
The hope is that the stock doesn’t entirely collapse from here. I wouldn’t be so sure of that premise today. In fact, if anything I would want to be first in line to sell this stinker.
I don’t care how well the Federal Reserve has seemingly navigated the economy to its current position of stability and growth. Paying a premium on a stock in decline just does not make sense.
What does make sense is to look at the P/E Gap for stocks that are dirt-cheap. I want to own the stocks that are growing profits rapidly and yet trade for a cheap price.
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