Time To Take Profits In Novartis And AstraZeneca?

| About: Novartis AG (NVS)
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We have substantial profits in Novartis and AstraZeneca.

Both are now richly priced.

Many analysts expect a stock market correction.

Continue to hold, but use a trailing stop.

Those of you who read our analysis of the opportunities created by Obamacare 18 months ago, and followed our recommendation to buy Novartis (NYSE:NVS) and AstraZeneca (NYSE:AZN), have done very well indeed. Novartis is up 42% (from $63.68 to $90.50), and in addition, has paid a dividend of $2.53 last year and $2.71 this year. AstraZeneca has done even better, up by 56% (from $48.24 to $76.00), but that rise was partly boosted by the takeover attempt by Pfizer. Many of you are wondering whether the time has come to take profits, especially as some analysts are predicting a sharp correction or worse.

At a P/E of 22, Novartis is certainly no longer a bargain, and I consider it fairly priced or overpriced, so do not recommend buying it. However, an overpriced stock can become even more overpriced, and it would be a mistake to sell it prematurely. Take a look at the chart of Novartis (from YCharts.com):

That's a clear uptrend, and you don't make money by going against the trend. My advice would be to hold on to Novartis, but to use a trailing stop strategy to protect yourself against a reversal of the trend. Exactly how you set your trailing stop I leave to you, because it depends on your tolerance of risk. Some people set their stop price at some fixed percentage (e.g. 10%) below the peak, moving it up whenever the price makes a new high; others sell when the price closes below the lowest price of the last 20 (or so) days. Either of these methods enables you to participate in further upward moves, while protecting some of your profit. There are free services, like cutyourlosers.com, that will update your stop automatically and send you an alert when it's time to sell. By the way, never reveal your stop price by entering a stop order through your broker; monitor the stock price yourself (or get a web service to do it for you), and then enter a market order to sell. And don't enter the sell order while the market is closed, for execution at the open. Enter your order while the market is trading.

AstraZeneca's uptrend is messier than Novartis' because of the sharp changes caused by Pfizer's offer and its rejection, but it's still clearly in an uptrend - don't sell a stock with a chart like this:

Revenue dropped in 2013 because of expiration of some patents, and consequently, the dividend was cut. The P/E ratio, using the current price and 2013 earnings, is now over 30. AstraZeneca has a healthy pipeline of new drugs in development (which is why Pfizer wanted to buy it), but at its current price, it is a speculation and not an investment; I would not advocate buying it. As with Novartis, the best strategy if you already own it is to hold it as long as the uptrend continues, and to protect your profits by using a trailing stop.

Disclosure: The author is long NVS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.