These recent winners may be running out of gas

 

One of the toughest things to do in investing is to take profits on a winning position. It is human nature to just assume that strong stocks are going to remain strong, but unfortunately that is not always the case, and in some cases it is better to go ahead and lock in some gains and seek better value elsewhere.

We want to take a closer look at a handful of stocks that fall into this category, each of which have rewarded investors with nice returns of late, but also appear to have lost their momentum and are in jeopardy of giving back some of their gains.

The point of this article is not to suggest that you completely sell off your position in these stocks, but instead to consider taking some profits off the table in order to lock in some gains.

Most investors set up their portfolio holdings by allocating a certain amount of the capital into each stock, but as our strong stocks rise in value, they often become overweight in our portfolio. What started off as representing 2.5% of your portfolio can quickly rise to 4% or 5%, and this is the time that you really want to make a move to re-balance your portfolio.

If you own the following stocks, take a closer look at your positions, and decide whether or not now would be a good time to lock in some gains and re-balance your portfolio.

Kellogg

Consumer goods maker Kellogg (K) has been a solid performer over the last year, but the stock now appears to have run out of steam, and investors ought to consider taking some profits off the table. After hitting an all-time high in July, the stock has sold off a bit, and did not get the help it needed with disappointing revenue figures for its most recent quarter. The stock has a high P/E of 47, and earnings are forecast to rise just 3.1% for the current year. While earnings are forecast to rise slightly this year, the rise is not high enough to justify the current valuation, and a reason why analysts have a price target on the stock that is basically in-line with where shares are currently trading. K trades at $82.31, while analysts have an average price target of $83.29k, which leads me to believe that the stock has very limited upside at this point. If you own K shares, you likely have a nice gain on the books, and may want to consider limiting your exposure and looking for better value elsewhere.

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Chart courtesy of www.stockcharts.com

United Parcel Service

Delivery giant United Parcel Service (UPS) has enjoyed solid gains of 14.0% in 2016, but the stock has formed a double-top trading pattern, which is clearly a bearish indicator. The company reported Q2 earnings that were in-line with the consensus at the end of July, but revenue fell short of estimates. The stock trades at $109.63, which is basically in-line with its $109.91 average price target, which will keep resistance on the stock for the time being. The biggest concern for the stock moving forward is the possibility of rising oil prices. Oil prices made a strong rebound at the start of the year, but cooled off a bit over the first half of the summer. Prices are once again trending higher, and if we see oil continue to build on recent gains, all the transportation stocks will find difficulty moving forward. Earnings are forecast to rise by 7.0% this year, and 6.5% next year, but those forecasts will be tough to hit if oil moves higher since energy costs represent such a huge percentage of the company’s overall expenses.

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Chart courtesy of www.stockcharts.com

The J. M. Smucker Company

The J.M. Smucker Company (SJM) has been strong, but the stock has hit solid resistance last month and has been trading sideways since then. The stock has a relatively high P/E of 26, which is somewhat overlooked with earnings expected to rise by 28.3% this year, but then growth is forecast to slow significantly next year to 7.8%. Wall Street has an average price target of $143.00 on the stock, but shares are trading well above that level at $152.00, which is going to keep resistance on the stock. If the company is able to post earnings that are better than expected when it next reports in September, we may see analysts boost their price targets on the stock, but if results fall just in-line with estimates it is unlikely that targets will be raised since the consensus has already been priced into the stock. The stock’s chart is showing classic signs of stock exhaustion, and with shares already priced for perfection current shareholders may want to look at taking some profits.

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Chart courtesy of www.stockcharts.com

Yum! Brands

Fast food chain operator Yum! Brands (YUM) stock came to life at the start of the year, but after a strong run for the first six months of the year, shares appear to have hit a ceiling. The stock has a P/E of 27, with earnings forecast to rise by 16.4% this year. While the earnings growth is impressive, the company has a huge amount of exposure in China, which should keep a ceiling on the stock until conditions start to improve materially. The stock trades at $89.62, versus its $92.13 average price target, so I do not think that the stock is in danger of a huge sell off, but the upside is just very limited at this time. Investors that got into the stock during the first half of the year are showing a nice profit, but with the stock showing a lot of exhaustion now would be a great time to reduce the position and reallocate the funds into a stock with a little better outlook.

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Chart courtesy of www.stockcharts.com

Garmin Ltd.

GPS product maker Garmin Ltd. (GRMN) has soared over the last few months, but the stock now appears to be in overbought territory and in risk of giving back some of its recent gains. The stock has a P/E of 20, which is not all that high for the stock, but with earnings forecast to rise a modest 1.2% this year, and 1.6% next year, there will not be a lot of catalyst to drive shares higher. Technically, the stock has failed to break through resistance over the last month, and a big reason for this can be traced back to Wall Street’s view of the stock. GRMN now trades at $54.50, but analysts have an average price target of $49.00. Until analysts start to change their estimates, the stock is unlikely to break out to the upside. GRMN is up 76.2% from its 52-week low, but with limited upside at this point, shareholders may want to consider locking in some gains and limiting their exposure.

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Chart courtesy of www.stockcharts.com

Symbols: GRMN K SJM UPS YUM
Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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