Two growth-at-a-reasonable-price (GARP) stocks I’ve written about previously reported disappointing earnings, raising a couple of red flags.
For one, the earnings of Monsanto Company (MON) and MSC Industrial Direct Co Inc (MSM) don’t exactly make me feel guilty about the overall economy. But more important to investors right now — they signal that it might be time to exit these stocks.
MSC Industrial Direct Co Inc (MSM)
I wrote about MSC Industrial in the summer of 2012, at a price of $64. I suggested it was a great mid-cap growth stock and a long-term hold. The stock rose 50% during the next two years, and midway through this year, I told you to sell out.
That’s the reason you must keep tabs on your investments.
I saw things in the earnings report I didn’t like, and didn’t support the initial long thesis. So I suggested you sell out — and if you listened, you would not have lost 22% in the stock since then.
MSM is one of the largest marketers and distributors of metalworking and maintenance, repair and operations (MRO) products, with more than 760,000 stock-keeping units (SKUs). Its ugly first-quarter report included earnings of 92 cents — down 3% year-over-year, and 3 cents below estimates. While revs were positive, up 8% to $731 million, there was more pain on the bottom line, as MSM guided lower for Q2, looking for a range of 84 cents to 88 cents.
There’s no reason to invest in a growth company if it isn’t growing. MSC Industrial is now projected to earn $4.11 in FY15, up only 4.5% YOY. MSM stock trades at 18 times earnings, and that’s just crazy given its present situation. The company is in fine shape financially, it just isn’t growing, and you’re overpaying for that growth.
If you haven’t sold MSC Industrial yet, sell it now.
Monsanto Company (MON)
Meanwhile, that eeeeevil company known as Monsanto, which is everyone’s favorite punching bag,saw earnings slide to an adjusted 47 cents on revenue of $2.87 billion, from 69 cents on revenue of $3.14 billion a year ago. This decline, however, was expected.
Monsanto reaffirmed FY15 guidance of $5.75 to $6 per share of MON stock and the all-important free cash flow of $2 billion to $2.2 billion. Monsanto also believes second-quarter earnings will be down 5% to 10% YOY, to a range of $2.85 to $3, mostly driven by a decline in corn planting.
There’s more bad news to uncover here. The company reduced its share count by almost 8% — which itself isn’t so bad — but that goosed EPS up by 5 cents. I am not a fan of companies that are not organically growing EPS but spend money on buybacks.
At $6 EPS for FY15, MON stock trades at 19.5 times earnings, yet earnings growth is going to be in the 12% range, again goosed by buybacks.
Monsanto really is a great company, but MON stock is overvalued, and growth isn’t what it was.
Three years ago, I told you to buy MON stock at about $80 per share. The story has changed, and I say you should sell here at $117 for a 45% gain.
Bottom Line
This is the problem with growth stocks. At some point, growth flags. Sure, it might pick up again, and if you’ve sold out, you may miss out on that upside.
However, capital preservation — particularly in a market where I see so many stocks selling for much more than they should — has to have a priority.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
