A quarterly survey by Northern Trust Corporation (NASDAQ:NTRS) of 100 investment managers finds that almost half of investors feel U.S stocks are overvalued. Meanwhile only 18% believe there is still value to be found in American stocks.
This negative picture of the U.S. equity markets should have investors considering their options in the days and weeks ahead.
Certainly, a viable option is to buy emerging market picks where investment managers are far more bullish. According to the second-quarter survey results, 57% of the same 100 investment managers believe emerging market stocks are undervalued, the highest score for any geographic region including the United States.
But another possibility is to sell some of your U.S. equity holdings — especially those stocks in your portfolio that are overweight — and look for better bargains at home.
The NTRS survey suggests a good place to start trimming back are large-cap stocks where just 35% of investment managers surveyed are bullish about their current prospects, and where shares may be overvalued at current levels.
With that in mind here are three overvalued large-cap stocks to sell now.
Stocks to Sell Now – Simon Property Group Inc (SPG)
REITs of every kind have been on a tear in recent years, and nowhere is that truer than with retail REITs. As a group, they are up 19% year-to-date and Simon Property Group Inc (NYSE:SPG) in particular is up about 18% vs. 6% or so for the broader market.
Investors are starving for yield in a low-interest-rate environment that makes income hard to come by. With the average equity REIT delivering a 3.6% yield, or approximately double that of the broader markets, it’s easy to see why they’ve come into favor.
However, this tailwind also means that some are very much overvalued. This is the case with SPG stock in particular, making it a prime candidate among stocks to sell right now.
Report after report indicates that America is severely over-retailed — and more importantly, over-malled. America has the highest retail sales per capita in the developed world; it also possesses the highest retail gross leasable area per person. The first number is good; the second, not so much.
Can you see the problem?
The U.S. generated $11,687 in retail sales per capita in 2015. The gross leasable area (GLA) per person in 2015 was 24 square feet. That means each person generated $497 in retail sales per square foot. In the UK that number is $1,600, or almost four times as much.
As a result of this imbalance, U.S. malls are rapidly disappearing. While SPG is somewhat isolated because it primarily owns Class A malls, it too will face a tougher economic climate in the years ahead.
Of its peers, SPG has delivered the highest five-year total return to shareholders (107.3%) through the end of May. As a result, its stock sits within 2% of $226.42, an all-time high.
For me, the stars aren’t aligning despite recent outperformance. Simon Property Group is a prime candidate for stocks to sell in August.
Stocks to Sell Now – Constellation Brands, Inc. (STZ)
There’s no question that Constellation Brands, Inc.(NYSE:STZ), the brewer of Corona, Modelo Especial and Pacifico for the U.S. market, has hit its stride in recent years. Shares are up 425% since the announcement in 2013, that it was buying the U.S. rights to Grupo Modelo’s beers for $2.9 billion.
Not many stocks can match its three-year performance. You have to tip your hat to CEO Rob Sands for knowing a good opportunity when he saw it and then having the ability to follow through on that thought.
But that was then. This is now.
In its first quarter report ended May 31, 2016, STZ generated $553 million in operating income from $1.9 billion in revenue. That’s an operating margin of 29.5%. Anheuser Busch InBev SA (NYSE:BUD), the company who was forced to sell the U.S. rights to Constellation in order to buy the 50% of Grupo Modelo it didn’t already own, had a similar operating margin in its first quarter ended March 31.
By most valuation metrics the two stocks are almost identical. I could just as easily suggest that investors sell BUD stock instead.
However, when you consider that STZ stock is up 16.6% year-to-date through July 26 on top of annual returns of 46%, 39%, 99%, and 71% respectively between 2012 and 2015, I can’t help but come to the conclusion that STZ’s marvelous ride is soon going to come to an end.
Maybe not tomorrow — but soon. That means this is a prime candidate if you’re looking for stocks to sell in August.
Stocks to Sell Now – Ulta Salon Inc. (ULTA)
Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) has to be the toughest of my three recommendations. Just two months ago, I included ULTA in a group of three stocks I believed would do well despite the fact it doesn’t pay dividends. Since then it’s up 21% and trading within 2% of its all-time high of $261.42.
Heck, like STZ, it’s done really well in recent years generating an annualized total return of 32% over the past five years.
But now it’s time to head to the sidelines until the next correction cheapens considerably the price you must pay for owning one of the more interesting business models in retail.
ULTA currently has a P/E ratio of 48, 26% higher than its five-year average. At its current PEG ratio of 2.2, it will take you almost 12 years to recoup the $250 per share price you’ll pay today for a dollar’s worth of earnings. That’s a big price to pay for excellence, even when it’s well deserved as is the case with ULTA.
Look, I don’t believe that ULTA’s stock price is about to fall through the floor. Its business is intact and growing.
However, when the markets correct the first stocks to get hit will be momentum plays such as Ulta. At current prices, a 20% correction would put its stock just below $200 — a great entry point.
Is a 20% correction in the cards? ULTA’s history suggests not. But one is surely coming. The numbers don’t lie.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.