With all of the headwinds swirling around stocks today, many
investors are seeking the safety of cash. It's a wise move, but not
for the reasons you may think. Cash is not just "safe," but it is
also firepower for the next major upward move in the stockmarket .
Right now, the
is tumbling, but it's crucial for you to be in a position to jump
into the market when a bottom has come in. You'll know it's there
when the market is no longer plunging (or occasionally surging) and
instead is trading in a tighter range.
So if you don't have cash on hand right now, where do you find it?
Among your portfolio's best performers.
It may seem counterintuitive to part with your most impressive
stock picks right now, but you need to know two things. First, they
may eventually succumb to the current weak stock market, and their
likely higher-than-normal price-to-earnings (P/E) ratios means they
could fall by a hefty amount. Second, the losers in your portfolio
are just as often a victim of poor
, and can often be oversold in these times of distress.
With that in mind, I've compiled a list of 2012's top-performing
stocks in the S&P 500 and S&P 400 (which is comprised of
stocks). Every one is up at least 25% since the year began, and all
sport a forward multiple that is at least 50% higher than the
(based on both 2012 and 2013
I got a chance to dig into this group, and have drawn a clear
conclusion. These stocks have mostly moved up for justifiable
reasons and don't necessarily make good short candidates. But in
many instances, it's simply hard to see any further upside from
here. So converting them into cash right now makes ample sense --
especially if you think the market may slip further from here.
as an example. The company caught the market off-guard in mid-April
by announcing the sale of roughly 800 patents (and the licensing of
300 more) to
for roughly $1.06 billion.
instantly shot up, but now that this one-time event has passed,
investors should realize this is a company still struggling for
relevance. First-quarter sales and operating profits were roughly
5% below year-ago levels. And though management has done a nice job
of stemming even deeper erosion, it's hard to see how AOL will
again be a growing company.
Monster Beverage (Nasdaq:
is another stock that may have already locked in much of its gains.
The maker of energy drinks has been a very solid growth story, and
has an impressive stock chart to show for it.
Yet the company's current growth spurt may be a bit deceiving.
Sales grew between 10% and 15% in 2008, 2009 and 2010, before
shooting up 31% to $1.7 billion in 2011. Sales are on track to rise
another 25% this year, surpassing the $2 billion mark. But it's
unclear if sales can keep rising at a fast pace. Analysts currently
expect sales growth to slow to around 15% in 2013 and 2014. But one
never knows if a market is partially saturated or fully saturated
until the moment that growth cools.
Meanwhile, it's hard to find a beverage stock that trades for
nearly 30 times next year's
forecasts -- and for good reason. The broader beverage category
grows very slowly, and the energy drink segment will eventually
feel that pull as well.
Part of the reason this stock is so richly-valued is that rumors
have swirled that
or others might want to buy the company. I discount those rumors,
but if I'm wrong, then this would be a bad stock to short. Yet it
surely looks like a good candidate for profit-taking, as
expectations of a further expansion in the forward multiple seem
hard to digest.
Lastly, investors have done very well by investing in
, but caution is warranted here as well. Cerner's management is
outstanding, capitalizing on the many advantages offered up by the
transition toward digital medical records. But a pair of companies
in this segment --
-- have stumbled badly recently due to poor execution, but also
partially due to a market slowdown in the face of the Supreme
Court's review of health care reform. This isn't to suggest that
Cerner is primed to deliver a bad quarter, but the forward multiple
looks pretty rich for a company in an industry showing signs of
some growing pains. It would be nuts to short a great company like
Cerner, but perhaps equally unwise to expect further major upside
if you own it.
[block:block=16]Risks to Consider:
Shorts are actively targeting some of these stocks, and if the
market moves back up, then these stocks could get squeezed higher,
which is another reason it's unwise to short them.
Action to Take -->
In a rising market, it's often wise to "let your winners ride." But
in a much tougher market, winning stocks can quickly become
vulnerable stocks. You may be able to re-purchase these stocks at
lower prices if the market's downward pull finally affects them.
But for now, the wisestoption may be to sell the stocks on this
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MSFT in one or more if its "real money" portfolios.
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