MENU

It’s Time to Hit the Snooze Button on This Stock!

Buy-and-hold forever is a wonderful investment philosophy if one selects shares of a company with the means to grow its earnings by an above-average rate over the long-term. While it’s completely fine to hang on for the rollercoaster ride, trimming your holdings can pay major dividends over the long haul if shares have grown to valuations that you personally think are too frothy.

Momentum really builds upon itself, and although that’s a nice problem to have as an investor who jumped in early, when a stock becomes this hot, it may be too hot to handle and thus, taking a bit off profit off the table may not be the worst decision in the world.

As Jim Cramer from Mad Money once said, “Nobody ever got hurt taking a profit!” You really haven’t locked in any gains until you hit the “buy” button, and although you may fear missing out on more upside, you could save yourself an immense amount of pain should shares revert to the mean.

If the price of a stock has surged well above the rate of earnings such that the P/E multiple is substantially higher than that of the company’s historical average, this may serve as a clue that it’s time to do some profit taking.

There’s no shame in taking at least a bit of profit, although there may be a stigma involved with selling your winners. You can always repurchase shares once the next dip arrives, so it’s important not to get too personally attached to the stocks you hold.

Consider Sleep Country Canada Holdings Inc. (TSX:ZZZ), a solid retailer with a wide moat (and pricing power) in the Canadian sleep industry. The company has really excelled when it comes to margin expansion and comps growth through the sale of sleep accessories beyond just mattresses and box springs.

Sleep Country isn’t just a mattress company. It sells pillows, duvets, sheets, toppers, bedframes and, interestingly enough, even lavender pillow sprays. I didn’t even know those were a thing, but for the price of $15, you too can fall asleep to the smell of a lavender garden!

Management has taken significant steps to promote accessories and its new e-commerce platform to go with its Bloom online mattress-in-a-box offering. Their efforts have paid off handsomely over the last few quarters, and the proof is in the pudding.

It’s clear that management deserves a round of applause for making Sleep Country a retailer that can thrive in spite of the digital disruption that’s happening across the entire retail industry. Before you back up the truck on the shares today, however, you should know that the valuation at current levels isn’t very attractive, especially when you consider the recent consolidation in shares.

The company’s first-quarter results were mediocre, to say the least, with earnings that were pretty much in line with expectations. The dividend was hiked by 12% to $0.74 (2.26% yield), but this isn’t much of an incentive for investors to jump in as shares continue to consolidate at the low $30 levels.

Sleep Country remains a wonderful business that investors should keep on their radars, but at 21 times trailing earnings, shares don’t look like a great value to me anymore. As such, I think shares are going to sleep for the summer, so investors should look elsewhere if they’re looking for a thriving retailer at this point. If you’ve profited over the last few years, it’s a great time to collect your winnings and put them in a name that’s a better value.

Stay hungry. Stay Foolish.

Our #1 Stock to Buy in 2018 (and Beyond!)

When you buy heavily cyclical stocks at low prices… and then hold the shares until the cycle reaches its peak… you can make a very healthy profit.

Every investor knows that. But many struggle to identify the best opportunities.

Except The Motley Fool may have a plan to solve that problem! Our in-house analyst team has poured thousands of hours into their proprietary research – and this is the result.

Our top advisor Iain Butler has just identified his #1 stock to buy in 2018 (and beyond).

The last time this stock went from the low point of its cycle to the peak… shares shot from $12 to $40 inside of 4 years. That’s an 300%-plus return. And if you missed out on that ride, today might just be your second chance.

Click here to claim Iain’s new report, absolutely FREE!

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.