The old adage “Sell in May and go away” is, like most adages, an oversimplification.
Nonetheless, almost all of the stock market’s net gains do tend to come in the seven months from October through April. The five months from May through September have been close to flat (on a cumulative compounded net basis) over the past six decades.
So May is a good month to look at your portfolio and do some weeding. I’d take a hard look at any stock that:
■ Has doubled in the past 12 months.
■ Sells for more than 50 times earnings.
■ Sells for more than 10 times book value (corporate net worth per share).
■ Sells for more than 10 times per-share revenue.
Here are five companies whose shares I suggest selling now. They are good or even excellent companies, but there is a huge difference between a good company and a good stock.
I admire the job Netflix Inc. did in reinventing itself when its old business model — shipping video disks by mail — started to became obsolete. Its new model — making available an immense library of old TV shows through various providers — is working. But the stock is selling for ridiculous prices.
A valuation of 346 times earnings? And 16 times book value (corporate net worth per share)? Come on — those are fad multiples. In my judgment, no financially sophisticated person should ever pay so much. People are buying because of familiarity with the product, not knowledge of the stock.
If you have held Netflix for the past year, you have tripled your money. Don’t be a pig, and quit while you’re ahead.
The social networking site run by Facebook Inc. is intimately familiar to many people. If you are below a certain age, it may be the locus for much of your social life. But that has nothing to do with the stock’s merits.
In the past four quarters, Facebook’s cumulative earnings were 2 cents. With the stock at about $26, it sells for 1,300 times earnings. It also rings another warning bell with a price that is just over 10 times per-share revenue.
Cree Inc., based in Durham, N.C., makes semiconductor materials and light-emitting diodes out of silicon carbide. Though not well known to the public, Cree has been publicly traded for 20 years and is followed by 30 Wall Street analysts, about half of whom rate it a buy.
I don’t. The earnings history is choppy, and the return on stockholders’ equity last year was less than 3 percent. There is not a strong case, in my opinion, for the stock to sell for the kinds of multiples it does: 89 times earnings and more than five times revenue. Just for comparison, IBM goes for 13 times earnings and 2.3 times revenue.
The newest, coolest product out there is the three-dimensional printer, also known as the stereolithography apparatus or the solid imaging system. 3D Systems Corp., with headquarters in Rock Hills, S.C., is a leading maker of these devices.
Unless you believe in buying advanced technology at any price, however, this stock is a walking danger sign. It rings three of my four alarm bells: It advanced 172 percent in the past 12 months, sells for 89 times earnings, and is valued at 10 times revenue.
If you love the technology too much to sell out of this stock (or if you don’t want to pay tax on all your gains), consider selling one-third or one-half of your holding.
LinkedIn Corp. of Mountain View, Calif., might be termed Facebook for corporate executives. It helps people find potential customers, suppliers, or other professionals with whom they can exchange ideas.
It’s a useful site, and revenue has grown from $120 million in 2009 to an estimated $1.5 billion this year. In love with the story, investors have bid the stock up to $182 a share, from $45 at the initial public offering two years ago.
But can LinkedIn attract enough advertising revenue to justify its ultrarich valuations? Since the stock sells for 521 times earnings, 20 times book value, and 17 times revenue, I don’t think so.
No doubt the people who own these five stocks figure they are simply paying up for quality. But experience tells me there are valuation points beyond which even good companies become bad stocks. I think these five stocks have passed those points.John Dorfman is the chairman of Thunderstorm Capital LLC in Boston. His firm or its clients may own or trade securities discussed in this column. He can be reached at email@example.com.