Wondering Which Stocks to Sell? There’s a List and We Explain How to Read It

Need to raise some cash? Those mid-year top performing stock lists, which will start appearing in the news next month, make for some of the best sell lists around. Anything in your portfolio designated a top performer should be considered for dumping.

That’s the take-home message of previous honor bearers. Most of the Top 10 S&P 500 performers in 2010 lost more than 20% of their value in 2011. Only two came out ahead a year later. Of 15 companies dubbed top gainers at mid-year 2011, eight have more than wiped out those gains in the year since. Here’s a sample.

NFLX Chart

NFLX data by YCharts

A market correction last fall didn’t help this bunch, although stocks generally have recovered from that. It’s sobering to see that so many of these companies fell off a cliff within months of their great gains and didn’t recover. Were there clues?

At several of these declining companies, share price valuations had grown well out-of-whack with historical trading levels. Netflix’s (NFLX) Pe ratio had grown to 60 by January 2011, which was about four times its average in the previous few years. Metro PCS (PCS) was trading at 25 times earnings shortly before it crashed, when it stayed under 17 most of the previous year. Electronic Arts (EA) didn’t have earnings, but its price-to-sales ratio had doubled in the 12 months leading up to its share price fall.

NFLX PE Ratio Chart

NFLX PE Ratio data by YCharts

Of course, six of those 15 companies did post gains for investors. So how does one pick the keepers on these lists? One way is to guess correctly about a takeover. Two of those gainers rose because they’ve been acquired. Here are the four others that rose. Their gains were not as spectacular as the losses from the others.

BIIB Chart

BIIB data by YCharts

Some signs of imminent success at those companies were more obvious than others. Biogen Idec (BIIB), a biotech company with a strong pipeline of new drugs, had just successfully revived one of its older treatments for multiple sclerosis. Television producer CBS (CBS) doubled its dividend in May 2011 and signaled that the strong earnings growth it had started racking up would likely continue. Cabot Oil & Gas (COG) found a lot of oil when competitors were drowning in too much gas. Dean Foods (DF) is a dairy company whose fate is bound eternally to the price of milk.

Really though, the chances of finding a good place to take profits on these lists are pretty high. So many investors do it that it’s one of the reasons big gainers tend not to hold that title for long. After all, selling high is hardly an original idea.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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