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The last time I wrote about Eaton Corp. plc (NYSE:ETN) I stated, that I was going to "stay away from the stock for now as it shot up quite a bit after earnings." I also stated that I was going to hold onto the stock for the long term, however, after endless debates with myself I did end up selling it during my quarterly portfolio change out because I did feel it was nearly fully valued and thought it was going to drop. Since it was time for my quarterly portfolio change-out I decided to sell Eaton out of the portfolio and replace it with National-Oilwell Varco (NYSE:NOV) because I believe Varco has a lot more upside to it than Eaton with the upcoming spinoff (click here for my article on the Varco spinoff). I know these two companies are in two completely different industries, but I believe it will be a trade up. The purpose for switching out of a technology stock to basic materials stock is because I like to try and mimic the percentages of stocks in all the industries of the S&P 500 (NYSEARCA:SPY) and in this quarter there were quite a few changes to the index which made me alter my mix. Eaton is a global technology leader in electrical components to the aerospace and automotive industries. On October 25, 2013, Eaton reported third quarter earnings of $1.12 per share, which was in-line with the consensus of analysts' estimates. In the past year the company's stock is up 35%, and is beating the S&P 500, which has gained 25% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to show why I sold Eaton out of the technology sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 21.06, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.55 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.88 per share and I'd consider the stock inexpensive until about $73. The 1-year PEG ratio (1.15), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 18.35%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 18.35%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 13.04%. Below is a comparison table of the fundamentals metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

05Aug13

66.06

19.43

12.74

5.19

77

1.62

12.01

13Nov13

72.45

21.50

14.84

4.88

73

1.17

18.44

14Dec13

70.97

21.06

14.55

4.88

73

1.15

18.35

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.37% with a payout ratio of 50% of trailing 12-month earnings while sporting return on assets, equity and investment values of 4.4%, 10.1% and 4.7%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.37% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

05Aug13

2.54

45.6

4.7

11.1

4.7

13Nov13

2.32

50.0

4.4

10.1

4.7

14Dec13

2.37

50.0

4.4

10.1

4.7

Technicals


(Click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle-ground territory without any trajectory and a value of 47.97. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars flattening out in height, indicating the bearish pattern is losing momentum. As for the stock price itself ($70.97), I'm looking at $71.63 to act as resistance and the 50-day simple moving average (currently at $70.22) to act as support for a risk/reward ratio, which plays out to be -1.05% to 0.93%.

Conclusion

I sold Eaton out of the portfolio for a 4% gain. These are two different types of companies with Eaton operating in the technology sector and Varco operating in the basic materials side of things. Fundamentally I believe Eaton to be inexpensively valued based on future earning and fairly valued on short-term growth prospects. Financially I'm giving up quite a bit of dividend but I believe it is okay because I like the capital appreciation opportunity much better with Varco opposed to the almost fully valued price I expect to take place with Eaton. On a technical basis Eaton is in no-man's land and believe it can go down further with the broader market. I only really sold Eaton out of my dividend portfolio because I felt it was very close to being fully valued but I will provide reports on how each is doing against each other as the future progresses.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Why I Sold Eaton Out Of My Dividend Portfolio For National-Oilwell Varco