A major surge in any givenstock can help pump up a portfolio's
returns, and for many investors, holding tight on a winning stock
pick seems like the right thing to do. After all, the news has
been good (perhaps in the form of raisedguidance or a
savvyacquisition ) and should remain positive in the months
There are 55stocks in the S&P 400, 500 and 600 that have
risen by at least 50% in the pastyear . If you own one of them,
then you're surely pleased.
Yet it's crucial that you provide a fresh, deep assessment on
these winning picks. What was once anundervalued opportunity may
have slowly drifted intoovervalued territory. Let's look at
Lumber Liquidators (
as an example. This maker of flooring has seen its stock rise a
stunning 180% during the past year, thanks in part to solid
quarterly results and also to a general sense that a new home
construction boom is about to begin.
Not only has this company been able to boostsales at a
double-digit pace for nearly a decade, but sales are expected to
grow another 10% to 12% in 2013 and 2014 as well. Andanalysts
think thatearnings per share (
) will surge from $1.68 in 2012 to near $2.40 by 2014.
Yet by a host of measures, valuations have started to move
into nosebleed territory. For example, the company is now valued
at around two times sales, even though itsEBITDA (earnings before
interest,taxes ,depreciation andamortization ) margins will never
be much above 10%. Companies with such low EBITDA margins often
trade closer to 1 or 1.5 times sales.
Said another way, Lumber Liquidators'enterprise value (which
equals a firm'smarket capitalization plus totaldebt minuscash )
now stands at nearly $1.8 billion, or more than 20 times trailing
EBITDA. Few stocks ever trade that richly.
Also, this company may not be the housing recovery play it
seems to be. As one writer on Seeking Alpha noted, Lumber
Liquidators has benefited strongly from the massivewave of homes
that have been bought out offoreclosure byreal estate investors.
However, homebuilders don't use the company's products when
building new homes -- they build their own flooring.
Cree's high bar
I laid out similar concerns last month for LED lighting firm
Cree (Nasdaq: CREE)
This is clearly an impressive company that plays a strong role
in a fast-growing industry. But investors are seemingly ignoring
key concerns such asmargin pressures and constraints oncash flow
generation. Cree is a perfect example of a company you want to
own after it has delivered a bad quarter or two.
I thought Cree was a greatinvestment in early 2012, whenshares
were trading in the low $20s, but the move up into the $50s means
the company must keep delivering greatquarters -- including
firmingprofit margins -- or investors willput it right back into
the penalty box, as was the case in 2011.
For some investors, the time is nearing to again look at
short-selling candidates. Themarket 's steady upward move has
pushed fearful short sellers to the sidelines, but a sideways or
down market will bring short-selling right back into
If you're looking for short-sale candidates, there are two
ways to skin the cat. The first is to look at the market's
top-performing stocks during the past year, many of which have
benefited from solid quarterly results but also a rising market
tide that has given momentum to stocks that already have high
momentum. The so-calledrelative strength approach toinvesting has
been a solid strategy in recent quarters, though that momentum
angle eventually peters out.
With that in mind, here are the 12 highest-performing stocks
in the S&P 400, 500 and 600 (all of which have a forward
price-to-earnings (P/E ) ratio of at least 20) during the past 12
The second way is to look at this group of stocks from a
different angle, focusing on those with the highest P/E ratio
(based on 2014profit forecasts) that have risen at least 50% over
the past 12 months. The fact that these stocks sport
forwardmultiples that are wellabove the market average will make
them ripe for selling once the market hits anair pocket and
investors seek to prune their portfolio of the most richly valued
This will be an interesting group of stocks to track during
the remainder of 2013. In a sideways market, they mayunderperform
simply because better values abound. And in a falling market,
their lofty valuations may lead some of these recent winners on a
sharply downward path.
Risks to Consider:
The market is still rallying as we head intoearnings season ,
and in keeping with Newton's First Law of Motion (a body in
motion tends to stay in motion), these momentum plays could be
swept yet higher until the market cools.
Action to Take -->
As we head into the fifth year of a robustbull market , it's
imperative you pay attention to valuations. It's wiser to focus
on value-oriented stocks, as they not only possess
potentialupside but better downside protection if the market gets
choppy. If you own any of these fast-rising stocks mentioned in
this column, you should closely monitor their upcoming conference
calls to be sure you still see further upside ahead.
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