Selling without regret
Middleby is going strong, beating estimates and gaining, but on a historical basis the stock is expensive.
Nothing unusual about these shares in the company, which designs, manufactures, and sells commercial food-service and food- processing equipment.
And that's exactly the point: At this stage of the rally, I'd like to keep close watch on valuations and sell individual stocks when a specific price seems to be getting out of line. I'd rather leave a few dollars on the table now than risk a major loss.
So, how do you tell if a stock is a sell now rather than a rocket with more gains ahead? I'd suggest taking a look at historical valuations.
Middleby beat Wall Street estimates by 8 cents a share when it reported earnings for the second quarter on Aug. 11. Revenue climbed 9.3% from the second quarter of 2009.
The stock then took off with the rest of the market in late August. From a low of $53.28 on Aug. 24, shares climbed to $76.83 as of the close on Nov. 2 for a gain of 44%. Shares fell almost 4% on Nov. 3.
That rally drove the stock's price-to-earnings ratio of 21 times trailing-12-month earnings per share and 17.2 times projected earnings. That compares with a five-year high P/E ratio of 29x and a five-year low of 6x.
The Wall Street consensus projects 8.6% earnings growth for 2010 and 14.8% earnings growth for 2011.
All this suggests that on historical comparisons, Middleby is expensive now -- and that at this price you're betting that the Federal Reserve's $600-billion program of quantitative easing is going to work to increase growth in the economy. (For more on the global market reaction to the Fed's move, see my post).
I'd like to buy the shares back at something like 14.8 times projected 2010 earnings of $3.74 a share, or about $55 a share. (That's a multiple equal to the stock's projected 2011 growth rate.)
So, as of Nov. 3, 2010, I sold Middleby out of Jubak's Picks with a gain of 29.7% since I added it to the portfolio on May 20, 2008.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
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Do it once a year. This allows the best-performing asset classes to take off and run.
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