The Motley Fool

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.