Knowing which of stocks to sell — and when to sell them — is just as important as knowing how to find bargains. After all, the idea is to buy low and sell high. True, no one can time the market or a stock perfectly, but you’re more likely to reap maximum gains if you don’t get greedy.
Too often, stocks hitting all-time highs come down hard off those peaks as investors take the opportunity to lock in profits, valuations become stretched or the outlook doesn’t warrant further gains. That’s when it’s time to get out. (Just look at Thursday’s drops in the S&P and the Dow as proof.)
As fun as it’s been watching these names make record highs this week, it’s hard to see any of them building on the trend. That makes these 5 stocks hitting all-time highs ones that you should sell while they’re still hot:
Stocks to Sell: Dillards (DDS)
Dillard’s (DDS) department store is hitting new all-time highs above $106 this week, which means profit-taking probably isn’t far away. True, half-a-decade ago, DDS was the JCPenney (JCP) of its day, and no one gave it a chance. But as unlikely as it seemed at the time, DDS managed to pull off a very successful turnaround.
Too bad there are no such catalysts for DDS stock going forward. Indeed, DDS missed Wall Street’s earnings estimates by a wide margin last quarter in the all-important holiday selling season. Current quarter earnings are forecast to be flat. Analysts estimates are coming down at faster rate than they are for the retail sector. And gross margin expansion seems to have run its course.
Take the money and run.
Stocks to Sell: DirectTV (DTV)
DirectTV (DTV) rocketed to a record high of $89.46 because of media reports that telecom giant AT&T (T) wants to buy the satellite-TV company for perhaps $50 billion. Yes, that would represent a 16% premium to the current share price even after rallying on the deal news … but why get greedy?
DTV stock is up 22% on the promise of a takeover by AT&T. It’s up 13% in just the last month. But that could all come crashing down. AT&T’s bid is by no means a slam dunk. The telco hasn’t even made a formal offer yet, and it’s unclear if regulators would bless any merger anyway. That leaves too much risk to the downside, so sell why the selling is good.
Stocks to Sell: Hormel (HRL)
Hormel (HRL) is having a good year despite turbulent times for food companies. HRL stock notched an all-time of $49.52 earlier this week and is having a solid 2014. Indeed, HRL is up almost 8% this year.
Unfortunately, the record-high price for HRL stock also makes it look unsustainably expensive. For one thing, input costs are going up. Energy prices are rising, while drought and disease are making beef and pork more expensive. Yet HRL trades at a 25% premium to its own five-year average on a forward earnings basis, according to data from Thomson Reuters Stock Reports.
Moreover, HRL already topped Wall Street’s price target, making downgrades on valuation a real risk. If you’ve got gains in HRL, you might as well lock them in.
Stocks to Sell: McDonald’s (MCD)
Strange as it may seem, McDonald’s (MCD) stock hit a record high very recently even as the fast-food chain struggles with ongoing sales weakness in the U.S. MCD stock touched $103.78 this week as part of its 6% gain for the year.
However, like HRL, MCD stock is now vulnerable on valuation. MCD stocks trades at more than 10% premiums to its five-year average by both forward and trailing earnings, according to Thomson Reuters Stock Reports. Besides, a forward P/E of more than 16 is hard to justify with a long-term growth rate of less than 8%.
The U.S. accounts for about a third of MCD revenue. When the market starts growing again MCD might deserve a premium valuation. Until then, MCD stays on our list of stocks to sell.
Stocks to Sell: Kroger (KR)
Kroger (KR) is doing well for the nation’s largest supermarket operator. KR stock is up more than 18% so far this year, and it notched a new all-time high of $46.93 earlier this week. KR is managing to grind out solidly higher growth, thanks in part to acquisitions and natural and organic products.
Once again, that leaves KR stock vulnerable on valuation, with shares fetching a 24% premium to their own five-year average by forward earnings, according to Thomson Reuters Stock Reports. At the same time, operationally, everyone is gunning for KR. Private equity firm Cerberus is buying Safeway (SWY) and already owns Albertsons. That’s a formidable rival. And Whole Foods (WFM) is rethinking prices after a poor quarterly showing.
KR might have a bit more upside in it, but at this point it’s safer to book any gains.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
