Sherwin-Williams: Painting Toward Bleak Share Price Action

| About: The Sherwin-Williams (SHW)
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If traders have learned anything from the bubble periods of technology, internet and real estate it's that even wonderful growth companies can get grossly overpriced.

Sometimes this same valuation mania strikes shares in more mundane industries.

Old line paint manufacturer Sherwin-Williams (NYSE:SHW) has posted excellent long-term results. They are somewhat cyclical. SHW showed down year-over-year EPS in 2008, 2009 and 2011 but are in the midst of an all-time record year in 2012.

Zacks expects SHW's 2012 earnings to surge by 54.3% to $6.39 versus $4.14 in 2011. A stock that used to be thought of as dull has become a market darling.

The shares have exploded from $69.50 in late 2011 to $150 as of October 12 (10 am).

The P/E has expanded to 23.5x the current year's estimate while the dividend is down to just 1.04% due to the recently inflated share price.

Check out the 10-year chart (shown below) to see how pricey SHW is today. Four of the five best buying opportunities of the past decade allowed purchase at multiples of 12 or under.

Yields at all five of those points ranged from 2.1% to 3.4%. SHW's current yield is an all-time low.

Sherwin-Williams crept up to 16.8x earnings in the last pre-recession hot market (during mid-2007). Buyers who piled in at that time ended up waiting four years before SHW broke significantly higher.

They had to endure a 43% drawdown from $74 to $42.18 along the way (see the chart's double-headed golden arrow).

Sherwin-Williams has a 10-year median multiple of 14x. Its average yield since 2002 is double today's level. Value Line assumes that SHW can settle into a slightly above historical 15 multiple over the next 3 - 5 years.

Value Line optimistically projects SHW can be earning $9.00 per share by 2017. Neither assumption is assured but even if those occur, as hoped for, there might be no upside. Here is VL's 2015 - 2017 projected price range target zone along with the insider trading record dating back to November 2011.

Thirty-one insider sells versus zero buys by company insiders do not denote great opportunity. The last open-market insider purchase came back on March 1, 2011, at $81.52 per share.

Here is a more detailed look at the past year's insider transactions.

If you own SHW take profits now while it is clearly quite overpriced. Sherwin-Willaims is a good short sale candidate as well.

Options savvy traders might wish to buy some March 2013 puts at strikes of $140 - $150. Your maximum risk would be 100% of the premium paid.

If SHW drops back to 15 times next year's Zacks estimate of $7.71 it could retreat to under $116. That would generate great percentage gains on all the puts shown below.

A $116 or lower price target appears quite achievable. Sherwin-Williams' 52-week low was $76.55.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.