Take Some Profits Now
Great Profits In Value Stocks
A Bargain-Priced High-Tech Stock
Searching for a topic with which to begin this column, I
considered some wonderful things that have happened recently.
Government spending has been throttled (slightly) thanks to the
The American economy is growing
The housing market is healthy again.
Corporate profits are booming.
Stock buy-backs are common.
Dividend payments are mushrooming, too.
Noting this, investors have been shifting money out of safe
havens and into more growth oriented stocks.
As a result, the stock market has been performing
Furthermore, there have been some great fundamental stories in
Germany and France have a plan to deal with failing banks.
Thanks to fracking, the U.S. energy industry is thriving,
helping U.S. drivers avoid high summer gasoline prices while
fueling dreams of independence from OPEC.
The National Highway Traffic Safety Administration recognizes
that self-driving cars are on the way-and is trying not to get in
the way, fuelling dreams of the end of drunken driving deaths.
The solar power sector is thriving, fueling dreams of low-cost
A Swiss solar-powered plane is flying across America in five
long hops, carrying one passenger, fueling dreams of solar-powered
everything. (As you read this, the plane is en route from Dallas to
St Louis, a flight that should take about 21 hours.)
An 80-year-old man recently climbed Mt. Everest, fueling all
kinds of dreams.
And my favorite stock, Tesla Motors (
), has more than tripled over the past 10 weeks!
It's hard not to feel good about that.
But then I realized, this is the kind of thinking-and the kind
of feeling-that comes near market tops!
So instead of dwelling on all those wonderful stories, I'm going
to do something more difficult, and say, "It's time to take some
What you sell, of course, is up to you. If you just joined us,
maybe you don't have any profits to take. But if you've been
reading Cabot's advice-and following it-for months, you really
should have profits, and you really should consider taking some
Which is not to say that I'm calling a market top. Tops take
time, and good profits are still quite achievable in the latter
stages. But I know this feeling, and I know what often follows
Speaking of taking profits, our ace value manager, Roy Ward, has
been taking plenty of profits lately.
On May 20, he recommended selling Actavis
, writing, "Activis (
) reached its Minimum Sell Price of 127.78 today. The stock was
first recommended in the April 2013 Cabot Benjamin Graham Value
Investor at 97.33 and has increased 31.3% during the past six weeks
compared to a gain of just 7.2% for the Standard & Poor's 500
Index. Actavis' stock price advanced more than 4% this morning
after the company announced a final agreement has been reached to
acquire Warner Chilcott for $8.5 billion. The purchase will enhance
Actavis's sales and earnings during the next couple of years, but
the rapid increase in the stock price is overdone. My new Min Sell
Price, after factoring in the proposed acquisition, is 130.58,
which adds credibility to my recommendation to sell. I advise
selling your ACT shares now.
Four days before that, on May 16, he recommended selling
, writing, "Open Text (
) reached its Minimum Sell Price of 69.70 today. OTEX was first
recommended in the October 2010 Undervalued Canadian Companies
Special Feature at 46.73 and has advanced 49.2% during the past 31
months compared to a gain of 42.3% for the Standard & Poor's
500 Index. Open Text reported disappointing first quarter results,
although new products and an acquisition could lead to brighter
prospects in the next several quarters. The company's current 32.3
price-to-earnings ratio is considerably higher than the 10-year
average P/E of 25.0. In addition, based on my five-year forecast
EPS growth of 12.3%, the PEG ratio (P/E divided by forecast growth)
of 2.63 is also too high. I advise selling your OTEX shares
Back on May 8, he advised selling TJX Companies
, writing, " TJX Companies (
) reached its Minimum Sell Price of 50.55 today. TJX was first
recommended in the June 2010 Cabot Benjamin Graham Value Investor
at 21.665 (adjusted for the 2 for 1 split on 2/3/12) and has soared
133% during the past 34 months compared to a gain of 51% for the
Standard & Poor's 500 Index. TJX is a very high quality
company, but the current 19.0 price-to-earnings ratio is
considerably higher than the 10-year average P/E of 13.5. In
addition, based on my five-year forecast EPS growth of 12.6%, the
PEG ratio (P/E divided by forecast growth) of 1.50 is also too
high. TJX will report quarterly results on May 21. I advise selling
your TJX shares now.
And back on May 3, Roy recommended selling Walt
, writing, "Walt Disney (
) reached its Minimum Sell Price of 64.26 today. Disney was first
recommended in the September 2011 Cabot Benjamin Graham Value
Investor at 31.04 and has soared 107% during the past 20 months
compared to a gain of 40% for the Standard & Poor's 500 Index.
Disney is a very high quality company, but the current 20.3
price-to-earnings ratio is considerably higher than the 10-year
average P/E of 14.7. In addition, based on my five-year forecast
EPS growth of 11.1%, the PEG ratio (P/E divided by forecast growth)
of 1.32 is also too high. Disney will report first quarter results
on May 7. I advise selling your DIS shares now.
Those are Roy's four most recent sales. Checking prices this
morning, I see that
every one of those stocks is now below where it was when
Roy recommended selling
. And those sell recommendations were all based on Roy's
calculations of the stocks' fair value; there was no market timing
But seeing so many stocks climb into overvalued territory in one
month is just one more sign that it's probably wise, as I said
above, to take some profits here.
And then what? Roy advises his readers to put the money right
back into the market, in stocks that are
. And one of his recommendations looks pretty good to me on a
technical basis as well. It's Qualcomm, which was a great hot stock
back in the late 1990s, and is a high-quality, dividend-paying
technology stock today.
Here's what Roy wrote recently.
designs, manufactures and markets digital wireless telecom products
and services based on Code Division Multiple Access (CDMA)
technology. Products include global positioning systems (GPS) and
integrated circuits and system software for wireless voice and data
communications. The company also licenses many of its 5,700+
patents and intellectual property to manufacturers of wireless
"Qualcomm continues to benefit from the rapid growth of 3G
(third generation or Tri-Brand 3G) wireless technologies and
smartphones in the emerging markets, including China. Globally, 85%
of wireless networks support 3G technologies. The next-generation
super-fast 4G Long Term Evolution (LTE) technology will be quickly
adopted in many parts of the world, and Qualcomm is now the leading
provider of LTE technology.
"The company's integrated circuit chipset, called Snapdragon,
helps power Apple's iPhone 5, Google's Android-based smartphones
including the popular Samsung Galaxy S III and S4, and Microsoft's
new Windows smartphones. Qualcomm's technology is also used
extensively in notebook and tablet computers. Management believes
Qualcomm will continue to achieve large market share gains. Sales
will likely advance 18% and EPS will climb 16% during the next 12
months. At 12.8 times my 3/31/14 EPS forecast of 4.83, QCOM shares
are a bargain. The balance sheet is very solid with no debt and
lots of cash to fund product research and expansion projects."
Yours in pursuit of wisdom and wealth,
Publisher Cabot Wealth Advisory