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John Dorfman
John Dorfman
Articles (150)  | Author's Website |

A Few Stocks to Weed Out of Your Portfolio

Time to take some profits on these stocks.

May 25, 2016 | About:

Last year, the U.S. stock market would have been down but for the gains in four hot stocks that go by the moniker of FANG -- Facebook (FB), Amazon (NASDAQ:AMZN), Netflix (NFLX) and Google (GOOG).

If you were fortunate enough to own some of those stocks, you might want to take some profits now.

This is a good time of year to think about streamlining your portfolio, taking some profits and discarding some losers. The old adage “Sell in May and Go Away,” has some truth in it.

According to Ned Davis Research Inc., more than 98% of the gains in the Standard & Poor’s 500 Index from 1950 through 2015 came in November through April, while fewer than 2% of the gains came in May through October.

Here are four stocks I would sell now.

Amazon

Of the four FANG stocks, Amazon.com Inc. (NASDAQ:AMZN) seems to me the most vulnerable. Popularity can be a curse when it pushes a stock’s price to the edge of a tall cliff. Amazon shares trade at about $702, up from about $35 a decade ago.

Today’s price is 289 times the past four quarters’ earnings and 72 times the earnings analysts expect in 2017. The stock is valued at 22 times book value (corporate net worth per share) and 2.9 times revenue.

I can justify the revenue multiple based on Amazon’s advanced warehousing and delivery systems, and its history of innovation. But in my opinion the other multiples are too high to justify.

Kimberly-Clark Corp.

Does your family use Kleenex? Huggies? Scott paper towels? Those are some of the ubiquitous products made by Kimberly-Clark Corp (NYSE:KMB). Familiarity and steady growth have helped this stock quintuple over the past 11 years.

Because its products have been in steady demand, the company has been able to borrow close to $8 billion, which is about 24 times stockholders’ equity. Up to now, all this borrowed money has resulted in enhanced shareholder returns. But the high leverage adds to risk.

Kimberly-Clark’s earnings have been in a declining trend for the past five years, and revenue growth has slowed down. I think the stock is overvalued at 19 times estimated 2017 earnings.

Sysco

Sysco Corp (NYSE:SYY), which provides food and food services to institutions (schools, businesses, hospitals and so on), used to be a profit machine. Its return on stockholders’ equity was above 30% in nine years of the ten years from 2001 through 2010.

No more. Last year Sysco’s return on equity was near 13%. Profitability has rebounded this year but still falls way short of the glory years. There is a fair chance the company may have to cut its dividend.

Despite these problems, Sysco shares trade at 35 times recent earnings, and more than 21 times next year’s earnings estimates. I think investors are remembering the Sysco of yesterday.

Kellogg

I recommended selling Kellogg Co. (NYSE:K) a year ago and that recommendation backfired, as the stock rose 20%. Nevertheless I repeat my sell recommendation on Kellogg this year.

The cereal company shows little snap these days, nor crackle nor pop. Its earnings “growth rate” for the past five years, excluding nonrecurring items, was negative 12%. The company’s debt is four times its equity.

With those sorts of issues on the table, I wouldn’t expect Kellogg stock to sell for much more than 15 times earnings. Yet investors right now are strongly predisposed to like businesses they view as safe and steady.

As a result, Kellogg stock goes for 47 times recent earnings, and more than 18 times estimates for the fiscal year that will end in January of 2018.

Past Results

I haven’t kept meticulous records on my past sell recommendations, so I can’t provide a comprehensive multi-year track record, as I do with many of my columns.

My sell recommendations from a year ago produced a total return of 4.5%. That’s not good, considering that the S&P 500 was down 2.1%. Axalta Coating Systems Ltd. (AXTA) and AbbVie Inc. (ABBV) declined as I anticipated, but Kellogg, Sabre Corp. (SABR) and Six Flags Entertainment Corp. (SIX) rose.

The year before, my sell recommendations had declined 12.1%, which was pleasing since the S&P 500 was up 15.6%.

Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.

Disclosure: I have no positions, long or short, in the stocks mentioned in today’s column, either for myself or for clients.

About the author:

John Dorfman
John Dorfman founded Dorfman Value Investments in 1999. Previously he was a Senior Special Writer for The Wall Street Journal, executive editor of Consumer Reports, and a managing director at Dreman Value Management. His syndicated column appears on Tuesdays on this website and also in the Pittsburgh Tribune Review, Ohio.com, Virginian Pilot and Omaha World Herald.

Visit John Dorfman's Website


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