Five Stocks You Might Want to Sell
Posted: May 23, 2017
As recently as May 15, the U.S. stock market hit record highs. This might be a good time to take a few chips off the table. Some reasons:
- Stocks are pricey, at 25 times earnings, versus a normal level around 15.
- The Federal Reserve will likely be raising rates in the next two years, not lowering them.
- The market has gone eight years without a decline for a calendar year.
- President Trump is a divisive figure and an inexperienced leader.
- The old market adage, “Sell in May and go away,” has some truth in it. More than 90% of the market’s gains historically have come in November through April.
You might want to go through your portfolio and weed out perhaps 10% of the stocks you own – both to discard losers and to sell winners that seem to be perched at unsustainable heights.
Here are five stocks where I think selling, or at least lightening up, is in order.
Community Health Systems
Community Health Systems Inc. (CYH), of Franklin, Tennessee, operates 160 hospitals in 22 states. The stock hit a peak of more than $52 in mid-2005, then fell more than 90% to $4.87 in November 2016. This year it has spurted 76%, back up to $9.84 as of May 19.
The company expanded rapidly through acquisitions – maybe too rapidly, since it has posted losses the past few quarters and now has debt equal to about nine times stockholders’ equity. It is starting to sell off some hospitals in an attempt to right the ship.
Expedia Inc. (EXPE), with headquarters in Bellevue, Washington, runs a popular travel web site. The stock has climbed to $141, topping its previous high, reached in the fall of 2015. However, there is lots of competition in that space from Trip Advisor, Priceline and others.
At today’s price, Expedia shares look vulnerable to me. They sell for 72 times recent earnings and 25 times estimates. And I fear those estimates may be optimistic. Expedia’s profit margin, which used to be comfortably in double digits, have fallen to the low single digits.
Olin Corp. (OLN), based in Clayton, Missouri, makes chemicals and ammunition. A lot of the chemicals – chlorine, caustic soda, and hydrochloric acid, for example – are routine commodities.
I owned Olin shares a few years ago, but I don’t anymore. The company’s debt has climbed to 159% of stockholders’ equity, which is above my normal limit (100% is usually my maximum). The company may need to cut its dividend, which has been 80 cents a share for many years.
Formerly known as Restoration Hardware, RH (stock symbol also RH) distributes furniture, lighting, textiles and other home products. Its stock cracked the $100 barrier a few times in 2015, then plunged to about $25 early this year. Today it trades at about $58.
The company earned a puny 0.6% on stockholders’ equity in the fiscal year that ended in January. Analysts expect better results for the current fiscal year. Even if they’re right, I’m not enthusiastic about the stock, which is trading at 27 times expected earnings and 70 times recent earnings.
Qorvo Inc. (QRVO), which hails from Greensboro, North Carolina, makes integrated circuits for the telecommunications industry. It is expected to post profits this year that slightly exceed those of 2016, and slightly trail those of 2015.
The consensus estimate for the stock’s price a year from now is about $72, which would be down three dollars from last week’s price. I don’t see much to get excited about here.
On my sell recommendations, I didn’t keep the kind of systematic records that I have on my buy recommendations. However, I have gone back, identified and tabulated eight columns featuring sell recommendations that I wrote from 2000 through one year ago.
On average, the stocks I said to sell have gone up, but less than the Standard & Poor’s 500 Index. They have trailed by 3.08 percentage points. My “sell” choices underperformed the market five out of eight times. So, I guess I would call the previous columns modestly successful.
One caveat: I was unable to find some prices from 2005, so my 2005 column isn’t in this tabulation. But I know that it was a bad year, since I said to sell Hanson Natural Beverage (now Monster Beverage), and it soared.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: I have no positions in the stocks mentioned in today’s column, personally or for clients.