Selling a company is a tricky proposition. If you’re investing for the long term, there’s often no advantage to be gained by selling a business unless its future outlook (i.e., potential for growth) becomes markedly worse or unclear.
Sometimes however, you might consider selling a stock if it becomes too large a part of your portfolio, or if it becomes obscenely overvalued. For example, I recently sold half of my shareholding in Reffind Ltd (ASX: RFN) around $1.37 because I felt that speculation had run too far, too fast.
Shares now trade at a substantially lower price, despite many new contract wins which, ironically, make the company more likely to succeed (which ought to be reflected in a higher share price).
(Investors looking for more information on when to sell can check out this in-depth article)
The share price of Domino’s Pizza Enterprises Ltd. (ASX: DMP) has also risen substantially this year, up 107% to trade at its 52-week high of $50.83. This reflects a Price to Earnings (P/E) ratio of 70 times last year’s earnings, which is extremely high.
However, over the long term the company’s growth outlook remains intact, with Domino’s entering new markets like Japan and capitalising on existing prospects in France and elsewhere.
Management will find it more difficult to ‘raise the bar’ on earnings due to each new store becoming an incrementally smaller portion of the business, but ongoing innovations in delivery, online ordering, and marketing will help to maintain or grow same-store sales while the brand footprint widens.
I definitely don’t consider the company a ‘buy’ at today’s prices, but I also believe it would be foolish (lower case ‘f’) for existing holders to sell while the outlook for growth remains intact. Holders with a large position – Domino’s is up 700% in the past five years – might consider taking some money off the table to reinvest elsewhere.
Another stock that investors might think about selling is Treasury Wine Estates Ltd (ASX: TWE), which is up a more modest 67% for the year and trades on a P/E of 68, although this P/E was influenced by some write-downs in the most recent results.
Treasury is trying to shift away from a focus on agriculture (though it retains its vineyards) to focus on becoming a world-class wine marketing company. Management is looking to build brands in the hope that buyers will select them based on their brand perception rather than price considerations, which can dominate the cheaper end of the market.
The difficulty is building a brand, as well as the fact that Treasury remains exposed to agricultural risks and international competition, which will remain fierce. Treasury was recently accused in the media of overcharging for a substandard vintage in one of its premium wine brands, which I considered a possible warning sign about trying to leverage a brand to raise prices too soon (which risks damaging both).
Besides brand-building, it is difficult to see where growth will come from and over the long term investors will also have to contend with a gradual decline in total alcohol consumption per person. For all these reasons, I would tend towards selling Treasury Wines at today’s lofty prices, despite the potential gains to be made from its recent acquisitions.
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Motley Fool contributor Sean O'Neill owns shares of Reffind Ltd. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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