Three stocks to take profits in - and a cheap share to buy
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Associate Editor
David Stevenson Mar 05, 2010
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It's now been a full year since the stock market bottomed out.
Since early-March 2009, the FTSE 100 index has climbed by 50% or so. If you foresaw that such a big rise was on the horizon 12 months ago, very well done. Most people didn't, and I can't say I did.
But that's now in the past. Making money in the markets depends on trying to make your next set of deals as successful as the last lot.
It sounds simplistic, but that means being prepared to sell out after shares have risen. We've been looking back at our tips over the last year – and we've some suggestions to make...
The markets are warning it's time to sell
"Buy to the roar of cannon, sell to the sound of trumpets" is an old Wall Street adage. It's been attributed to British banker Lord Nathan Mayer Rothschild during the Napoleonic wars in 1810.
It's as true today as it was then, however counter-intuitive it feels. History shows that the right time to pile into shares at times such as 12 months ago, when it looks as though financial Armageddon is just around the corner. In turn, the time to get out is when everything is looking much better again.
With the run up over the last month, the FTSE 100 index has now climbed above January's highs, and the trumpets are sounding quite loud again. Particularly over in the States. We freely admit that we've been wary about the latest surge in prices. That's because stock valuations overall never fell to the sort of bargain basement levels we were looking for. And the US market's p/e ratio is now looking more than toppy again, as we pointed out in our blog last week: Just how 'over the top' are US stocks?
Though, despite our broadly cautious view, we've still tipped a regular stream of stocks in Money Morning and in MoneyWeek magazine (claim your first three issues free here if you're not already a subscriber). Our focus has been on stocks that have looked good value, and have generally paid a much better-than-average dividend yield. We've also favoured 'defensive' areas that don't need economic growth to make their money.
Now, we've explained the basis for buying these several times, most recently this week, so I won't run through it again here. And while it's been hard to beat the performance of some of the 'dash for trash' cyclical stocks, most of the shares on our list are showing a reasonable capital gain, along with paying some tasty dividends to shareholders.
Stick with BAT
For example, as Stephen Bland explains in his latest issue of The Dividend Letter newsletter, cigarette seller BAT (LSE: BATS) – which is also one of our favourites – has just hiked its payout by a "staggering" 19%. You can find out more about The Dividend Letter here.
Where the value - and the yield - is still there, as in BAT's case, it makes sense to hold on. That value is likely to show through into the share price at some stage. But where the prices of our tips have shot up much faster than their profits, and dividends are rising, then the valuations are clearly becoming more expensive. That means it's time to take profits – and here are three prime candidates.
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Three stocks to take profits in
We tipped takeaway chain Domino's Pizza (LSE: DOM) just over a year ago when it was 215p. It's still a good company. But at its current share price of 338p, up 57%, the stock is now on a current year p/e ratio of more than 22. The consensus forecast by City analysts is for this to drop to 20 in 2011, but that's still pricey. What's more, the move in the price has lowered the prospective yield to just 2.6%.
The next sale selection is car and bike accessories retailer Halfords (LSE: HFD). It's been in the news recently for buying Britain's biggest car servicer Nationwide Autocentres. That's probably a good move. But the shares have soared by almost £1 within the last month to 470p, nearly 50% higher than our July recommendation. On a current year p/e of 12.4 and yield of 3.8%, Halfords still looks OK price-wise, but it doesn't offer the value it did back then. Given that, and given the gains the stock has seen, now looks a good time to lock in your profits.
Finally, three months ago we tipped the US-listed ADRs of Nintendo (US: NTDOY). As the gadget fanatics among you will no doubt be aware, Nintendo is launching its bigger DSi XL. This "is hardly a revolutionary new machine", says Tech Central. But it's had a big effect on the share price. In sterling terms, the stock is now up more than 30% since our tip. On a forward p/e for next year of over 16, and forecast yield down to 3.2%, Nintendo isn't looking anywhere as cheap as it was. That sort of quick-fire profit isn't to be sneezed at.
And one that's too cheap to ignore
And if you're minded to make a replacement, I blogged about one this week. It's not without risk, as you can see, but high street music and book retailer HMV (LSE: HMV) is currently about as cheap as you can get, on a 10% yield and a p/e of just over five. Now that's something you don't see very often!
Our recommended article for today
It should be a good year for biotech. It's well placed to profit from Big Pharma's woes - and it's cheap. Buy in now, and you could even be getting in on the next big bubble, says John Stepek. Here he tips four of the best bets in the sector.
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