Potential Sell Candidates: Time To Trim These 10 Big S&P 500 Winners?

by: Alan Brochstein, CFA

Last week, I took a look at 31 S&P 500 stocks that had been cut in half in 2011. This is an interesting time of the year to bottom-fish, as investors big and small look to sell losers in order to minimize capital gains taxes. Also, professional investors like to clean up their holdings that will be on display to their clients at year-end. The flip-side is that many winners are held in order to avoid realizing taxable gains as well as to "look smart". With this in mind, I wanted to look for potential sell candidates.

So far in this year of little change in overall equity prices, 47 out of the 500 current members of the S&P 500 are showing gains in excess of 25%. Winning stocks get there two ways - the valuation goes up or the fundamental metrics improve. Since we don't want to consider selling a stock that is still cheap or that is improving its fundamentals rapidly, I set up a screen to try to find some potential early-2012 reversal candidates. Here's what I did:

  • S&P 500 Member (500)
  • YTD >25% (47)
  • 3-month Price Return > 6% (37)
  • Next Year Estimate Revision Past 3 Months < 4% (25)
  • PE vs. 5-year Average > 0.8X (23)
  • 2013 Projected EPS Growth < 13% (10)

The point of the screen is to make sure there isn't an obvious reason for the price performance. None of these stocks are enjoying huge positive earnings revisions, are deeply undervalued relative to recent PE valuations or are growing faster than the overall index is projected to grow in 2013. While perhaps I am overlooking opportunities among the 37 big winners that didn't meet the other criteria, here are the 10 that made the cut (click to enlarge image):

I find it interesting that 6 of the 10 economic sectors had representatives, even the lowly financials. Most of the stocks have higher PE valuations than the overall market, but nothing jumps out as particularly expensive at first glance. Compared to their 5-year averages, most of the stocks are reasonably close to average. I included a "PEG" ratio too. With the exception of the REIT and the utility, which typically don't fare well in this type of analysis, most of the stocks look reasonable on this basis.

TJX Companies (NYSE:TJX) is a "new normal" stock, sitting near an all-time high and up more than 3-fold over the past few years. From a valuation perspective, it looks ok near its 10-year median and in line with its closest peer, Ross Stores (NASDAQ:ROST). EBITDA margins are at their highest levels ever. From a technical perspective, while the stock isn't particularly overbought, it is somewhat extended in its uptrend. I think that this stock could be vulnerable to some profit-taking when the calendar turns, especially if the overall environment becomes more bullish.

Limited Brands (LTD) has been firing on all cylinders and is also near an all-time high, up 7-fold over the past few years. From a valuation perspective, it trade within 10% of its 10-year median PE with only slightly above-average margins. From a technical perspective, the stock isn't really overbought short-term nor is it particularly extended. In fact it's basically unchanged over the past six months. I view this one as a bit less vulnerable to profit-taking in early January.

Philip Morris Intl (NYSE:PM) is sitting near its all-time high and is up sharply from its March 2009 lows near 32. It's dividend yield has contracted from 5.5% to 4%, holding firm over the past year as the company has dramatically boosted the dividend. Valuation seems a bit full at 11X EV/EBITDA. From a technical perspective, it seems a little overbought short-term but not extended in its rally. This stock might see profit-taking should there be a surge in the dollar or in a more constructive market environment as investors look to boost beta, but, otherwise, it's not too clear.

Moody's (NYSE:MCO) is nowhere near an all-time high but has more than doubled from the lows a few years ago. Valuation looks very reasonable here, and it's on top of margins that are well below historical levels (though those old margins probably aren't attainable). From a technical perspective, the stock is down sharply from recent highs and doesn't look at all like it is vulnerable to profit-taking.

Public Storage (NYSE:PSA) is near all-time highs and up almost 3-fold from the 2009 lows. The valuation seems pretty full, but the 3% dividend yield is just average for the past decade. Given its maturity, the sharply higher pay-out ratio and its slower-than-historical growth, that's perhaps a bit misleading. From a technical perspective, it's a little overbought and not particularly extended. I still think that this one might be vulnerable to some profit-taking, especially in a more optimistic market should that materialize.

What a fantastic year Biogen Idec (NASDAQ:BIIB) has had after doing nothing for ten years. It is now up about 3-fold since its low in 2008. As an aside, this should be a reminder that stocks can emerge from very long consolidations! The valuation here is still about as low as it has ever been. From a technical perspective, the stock is not really overbought nor is it overextended - it is still below the October highs and only slightly above the prior peak in June near 109.50. I wouldn't count on a big pullback from these levels.

Humana (NYSE:HUM) has had stand-out performance for the Healthcare sector, up about 5-fold since the 2009 lows. The PE seems low, but it's much higher than peers. From a technical perspective, the stock is a little overbought but not overextended. Still, it looks a little vulnerable to some profit-taking in early January.

Total System Services (NYSE:TSS) is in the recovery mode, way below its 35 peak in 2007 but up about 2X from the 2008 lows. I looked at this one in 2009 from a governance standpoint and was uncomfortable with several aspects, including overlapping boards with its former parent and other issues that were clearly detailed int he proxy. The valuation isn't a particular problem (8X EV/EBITDA). The stock is a little overbought but not extended. This one doesn't fit the year-end profit-taking potential story very well - the price is barely up from two years ago.

International Business Machines (NYSE:IBM) trades near an all-time high. Valuation is close to "Buffett" levels given his purchases in Q3 and certainly don't look like a problem at 9.6X EV/EBITDA. From a technical perspective, it's not really overbought and not overextended. I don't expect material profit-taking for "Big Blue".

Nisource (NYSE:NI) is nearing the top of a very long sideways range that was breached to the downside briefly in late 2008 and early 2009. The stock has more than doubled over the past few years. The valuation is above-average on a PE basis for the past decade but still below prior peaks. Similarly, the dividend yield at 4.1% is near a 4% floor that has been intact for the past decade and below the 5% median, but that's not surprising. The stock isn't too overbought but is looking a litle extended in the rally. I think that NI as well as Utilities in general could see a bit of profit-taking as the calendar turns.

We have looked at 10 big winners that met some other criteria. While a few seem somewhat vulnerable to potential deferred selling, I didn't see any real table-pounders. If you own any of these stocks or are looking to buy them, it might make sense to be a bit cautious in the very near-term later this month. Also, while I have looked at just the S&P 500, there are many smaller companies that might fit these same criteria as well. Finally, note that there is generally a defensive nature to the majority of these stocks. A more bullish market environment could lead to some supply of these stocks as their happy owners look to take advantage of other opportunities. On the flip-side, a nasty downturn in the market could also draw in sellers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.