Lately the stock market has been on a tear. Stocks saw their best January performance since 1997. Since December 19, the S&P 500 (SPY) has exploded to the upside with a 10% rise. However, this has been a rally from discount levels. Bloomberg reported that the S&P has not traded above its mean valuation of 16.4 for 446 days, the longest slump since the Nixon era. Fair value has become a ceiling for stocks. Investors are nervous about earnings sustainability and stock overvaluation in general. With nervousness comes the potential for a sharp sell-off at the first sign of a problem now that the market is closer to being fairly valued. After such a strong run in the stock market, this is a good opportunity to look at some stocks that have moved up significantly and might present an opportunity to take some profits.
Sherwin Williams (SHW) has bucked the trend of a valuation slump that the stock market has exhibited. It is trading around $97. Shares have returned upwards of 200% over the last 10 years, while earnings growth has averaged only 9.6% over that same timeframe. Looking at some valuation comparisons between Sherwin Williams and its direct competitor, PPG Industries (PPG), we find Sherwin Williams with a price to earnings ratio of 23.5 and price to earnings growth ratio of 1.43. PPG's price to earnings ratio is 13 and price to earnings growth ratio is .94. In its latest earnings report Sherwin Williams narrowly beat earnings estimates. Company guidance for 2012 earnings came in at a range of $5.37 to $5.67 versus expectations of $5.58. These numbers do not justify any additional price to earnings expansion, considering they are not blowing away earnings expectations and PPG's valuations are substantially lower. With the housing market still in a slump, it is time to take some money off the table of this high flyer.
YUM! Brands (YUM) is trading near $63 with a dividend yield of 1.8%. Yum! stock has ridden the coat tails of the meteoric rise in McDonald's (MCD), but the move of Yum! may not be justified. In its third quarter earnings report Yum! reported a drop in U.S. sales while McDonald's continues to churn out U.S. sales increases of 5-7%. McDonald's also trounces Yum! in management acumen as evidenced by a 20% profit margin versus 10% at Yum! Brands. All boats rise with the tide, but Yum! Brands appears to have some holes in it and might warrant abandoning ship.
Ross Stores (RST) is trading near $51. It pays a dividend of 0.8%. Rumors have been swirling for many months of the possibility of Ross Stores being bought out in a leveraged buyout. Since August we have seen the stock shoot up over 50%. In that same time frame, the price to earnings ratio has jumped from 14.6 to 19. In its latest earnings report the company upped guidance for 2012. With its price to sales ratio of 1.39 versus the industry average of 0.75, the stock appears overvalued. At these levels, all the good news might already be priced in.
Comcast (CMCSA) is trading near $27. The cable TV, Internet, and phone service provider has seen a nice 27% move in its stock in the last two months. The company continues to face the pressures of losing TV subscribers with a loss of 165,000 video subscribers in the most recent reported quarter. However, it did add 261,000 broadband subscribers. With services like Netflix and Hulu gaining tremendous momentum it will be very difficult for Comcast to add net TV subscribers going forward. With a higher than market price to earnings ratio of 19 and an expected average 5 year growth rate of only 8.8%, this stock looks to be ripe for profit taking after this latest upside move.
Priceline (PCLN) is trading around $530. Since October 2008 Priceline has been one of the market's best performing stocks, rising from the $50s to the mid $500s. The stock has been stuck in a range of $444 to $555 over the last year. The company recently announced it is killing off its pitchman, The Negotiator, after a 14 year run. Priceline is shifting its business model from a name your price model to a fixed price model. As the old adage goes, if it isn't broken don't fix it. Even though the stock has stagnated, the business model has worked extremely well. Priceline differentiated itself from the competition by offering a service that no one else offered. Now, the company will be biting the hand that feeds it. Major hotel chains advertise a price match guarantee on their website with cash back if a customer finds a better deal on another site. Therefore, it makes no sense to book a hotel through another site. Revenues and earnings have been growing quite substantially over the last year, yet the price to earnings ratio has contracted from 44 to 28. This is a red flag. A wait and see approach is warranted with Priceline. After a decent run in the stock, it is wise to consider selling until management proves it can be effective in implementing this new strategy.