February has been an outstanding month for stocks, with the S&P 500 Index rebounding 6% in the 14 sessions after hitting a low on the first trading day of the month.
The move more or less acted as a salve for January, which had Wall Street worried about a hangover following a boffo 2013.
While the bull market is showing no signs of slowing down, this type of move provides an opportunity to reduce positions in stocks that have become overextended.
Looking ahead to March, five stocks fit the bill.
Stocks to Sell #1: The Hershey Company (HSY)
Click to Enlarge Hershey (HSY) has amply rewarded investors who have held the stock through its nonstop run of recent years. HSY stock rose 37% in 2013, it’s up nearly 12% so far in 2014, and it has delivered an average annual return of 32% since the 2009 low.
The fundamentals remain strong: Earnings estimates are gradually ticking higher, and the company is on track for double-digit earnings growth in the coming year on the strength of new products.
Not least, Hershey recently announced a $250 million share repurchase.
All of this has been great news for HSY stock, but the trouble now is valuation: Hershey shares are trading at a pricey 29.7 times trailing earnings and 23.5 times forward estimates. While valuation alone isn’t a catalyst for a downturn, the stock could soon see reduced demand with the shares up from the mid $90s to nearly $110 since the start of the year.
Stocks to Sell #2: Alpha Natural Resources (ANR)
Click to Enlarge Alpha Natural Resources (ANR) is the counterpoint to Hershey: Rather than a high price and good fundamentals, it’s trading near a 52-week low — and with good reason. A weak outlook for metallurgical coal prompted the company forecasting lower sales in 2014, and its earnings estimates continue to fall for both this year and next.
The result is that ANR stock has been unable to gain ground even as the broader market has rallied, leaving its shares right above support in the $4.78 to $5 range.
On its own, this might not necessarily be a bearish sign. However, Arch Coal (ACI) and Walter Energy (WLT) — both of which are heavy on the metallurgical coal side, like ANR — are also sitting near support. The last time these two stocks tested support (about this time last year), they suffered breakdowns that precipitated weakness that lasted until mid-summer.
Coal stocks will be a lottery ticket for investors who can time the recovery, whenever it may occur. For now, however, the charts for these three stocks are indicating that the risks continue to outweigh the rewards.
Stocks to Sell #3: Tesla Motors (TSLA)
Click to Enlarge If history has taught us anything, it’s that valuations don’t matter with Tesla Motors (TSLA). The stock essentially discounts the prospects for a game-changing technology, which means the range of outcomes is so large that current metrics don’t really matter for near-term performance.
Whether the bulls or bears are ultimately right on TSLA stock, the bottom line is that a large portion of its day-to-day movements are dependent on broader investor sentiment.
In the short term, that might be a good thing since the March-April period has been one of the best times of the year to own stocks throughout history. At the same time, however, February has brought substantial gains not just for Tesla (which now stands about $120 above its autumn low), but also other momentum stocks such as Facebook (FB), Netflix (NFLX) and Priceline.com (PCLN), not to mention solar stocks, 3-D printing stocks, and so on.
The fact that all of these stocks have moved higher as a group should give pause to an investor who owns any of the individual names.
The table below shows the distance of the momentum favorites from their 200-day moving averages as of the close on Tuesday, Feb. 25. Experienced investors know that “too far, too fast” isn’t a valid reason to sell. However, these are sizable numbers that indicate a risk-reward profile that’s less favorable than it was just a few weeks ago.
Let these stocks run as far as they can, but be ready to hit the sell button as soon as the tide turns. With such strong returns in the books, it just doesn’t make sense to get greedy.
|Stock||TICKER||% from 200-day MA|
Stocks to Sell #4: Caterpillar (CAT)
Click to Enlarge It looks like Caterpillar (CAT) stock has finally realized that we’re in a bull market. After being dead money through most of the 2013 rally, CAT stock has taken off in the past three months with a gain of about 16% since Nov. 30. Now, its shares are nearing the $100 level — an area that acted as support in 2012 before becoming resistance last year.
While a breakout is certainly possible if the broader market keeps rising, the more likely scenario is that CAT will stall in the coming weeks. There’s more to CAT’s business than its mining segment, but this still represents the largest driver of its performance. With commodity prices likely to remain under pressure and mining companies looking to curb the capex excesses of recent year, Caterpillar’s business should continue to face headwinds.
Currently, analysts are calling for revenue growth of just 1.2% in 2014 — indicating that CAT stock may be premature in discounting a recovery. Use this rally as a chance to take profits or, at the very least, to sell calls.
Stocks to Sell #5: iShares iBoxx $ High Yield Corporate Bond ETF (HYG) or SPDR Barclays High Yield Bond ETF (JNK)
Click to Enlarge If you own high-yield bond ETFs as anything but a long-term, core position, it’s time to consider looking for opportunities elsewhere. High yield has outperformed the rest of the bond market during the past year thanks to nearly ideal conditions: recovering economic growth, a low default rate and elevated investor risk appetites.
At this point, however, all of these factors are well-known … meaning the upside is capped.
It’s certainly possible that a continued risk-on environment will lead to slight price appreciation in iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Barclays High Yield Bond ETF (JNK) above their coupons from now through year-end. Unfortunately, that’s about the limit of what investors can expect with absolute yields and yield spreads both deep on the low end of the historical range. At the same time, any negative surprise that causes risk appetites to evaporate could lead to meaningful downside.
And with yields already near record lows, there’s no longer much income to offset the downside risk.
Anyone who owns a longer-term position in high yield knows that it has paid to ride out the tough times. But for those who aren’t committed to the asset class for the next three to five years, this is an outstanding opportunity to trim your position.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.