Stocks and people have a lot in common.
TV’s Dr. Phil is famous for saying that the best predictor of people’s future behavior is their own past behavior.
I agree with him on that point and think it applies to stock trading just as much as it does with human behavior. A stock’s own history is a great guide to letting you know if it is a good or bad bet going forward.
Many equity analysts want to impose their views on what a company’s P/E "should be" while ignoring the actual historical levels it has commanded in the past. I prefer to use the same stock’s actual valuation levels when it was clearly a "must buy" or "must sell" based on prior trading as my guideline for predicting its future.
I recommended little-followed Ingram Micro (NYSE:IM) here on GuruFocus back on Aug. 27, 2012. The company was extremely out-of-favor at that time. IM traded at a discount to book value and for just 8.3x trailing earnings, its lowest multiple since the bottom of the 2008 to 2009 crash.
- Warning! GuruFocus has detected 6 Warning Signs with IM. Click here to check it out.
- IM 15-Year Financial Data
- The intrinsic value of IM
- Peter Lynch Chart of IM
You can see all my original reasoning for liking its prospects by clicking on the link below.
This is the chart I used to graphically illustrate how cheap IM looked at that moment in time.
My very conservative 12-month target price was $18 while I figured $23 was possible within a year or two.
There was no enthusiasm shown for my pick among GuruFocus readers at that time, based strictly on the comments I received following publication.
As it turned out, Ingram Micro was able to beat both its 2012 and 2013 earnings projections. The shares outperformed as well, closing at $30.56 on Wednesday, April 9, 2014.
After doubling in less than 20 months I think it’s time to say goodbye to a great holding. The company is doing great. EPS hit a new high in 2013 and are expected to grow again in 2014. So why sell? Valuation is no longer cheap by IM’s own standard.
Ingram’s P/E was slightly higher at yesterday’s close than it was when the shares peaked in 2008 and 2011. Anyone who didn’t lock in gains at ’08's top had to wait about five years to get even. From the 2011 pinnacle it took more than 26 months just to recoup the next 17 months' decline of 33%, as IM dropped back from $21.60 to $14.40.
The Value Line Investment Survey is a great resource for those who want to see many years of historical data along with the corresponding stock price action, all on one page. Nobody else offers that. Not S&P, not Morningstar, and not commonly used Yahoo Finance or MSN Money.
Value Line kindly figures each company’s average annual P/E for you. I added the color-coded "best buying opportunities" and "should have sold" moments along with their respective P/E ratios at those times.
IM is a low margin business. It doesn’t typically attract a high multiple. The calculated average for the most recent six years was just under 10x. I’m willing to allow that Ingram Micro could be worth more than that average due to the effects of ZIRP and the generally depressed stock pricing that occurred post-2008.
Assume a 10% premium to IM’s historical P/E and you’ll arrive at these projections based on current consensus estimates.
11x 2014 Estimate of $2.60 = $28.60 price target (year-end 2014)
11x 2015 Estimate of $3.00 = $33.00 price target (year-end 2015)
IM shares appears slightly overvalued right now and not especially cheap even looking out almost two years, even if everything goes as well as is hoped.
If the Dr. Phil theory holds true, it is appropriate to cash out now to avoid an inevitable regression to normal. Knowing when to be satisfied is an important virtue if you hope to show great investing results.
Disclosure: I no longer have any position in IM.