There are several reasons why investors need to periodically take a step back and look at their current holdings for profits to lock in. Given the stock market’s bull run in recent years, and the current uncertainty in the global economy now is a great time to take a look at a few widely held stocks that investors may want to consider taking some profits out of the position.
Locking in profits is good when markets turn volatile because you can keep some cash on the sidelines ready to reinvest very quickly once stability returns. Another good reason to lock in profits on positions with sizable gains in that often these positions have simply grown in value to the point where they are throwing your entire portfolio out of balance.
A good general rule of thumb is to keep your exposure to any one security at 5% or less of your overall portfolio. The smaller the better in order to keep your losses at a minimum if weakness hits any one of your holdings. If you allocate 3% of your portfolio to a stock that subsequently appreciates 50% then that position now accounts for much more than just 3% of your holdings and you should put that position back into balance. This can happen quickly, and while it is tempting to keep holding the position and hope for more gains, it is much wiser to keep a well-balanced portfolio.
Here are a few big name stocks that you may want to rebalance in your portfolio while locking in some gains.
Credit card company Mastercard (MA) has enjoyed steady gains over the last five years, with the stock appreciating 47.8% so far in 2019 alone. The strong run has MA trading just shy of its all-time high, which in turn has boosted its valuation into slightly overbought territory. The stock is currently trading at 43 times earnings. The company has been growing earnings at a strong annual rate of just over 20% the last five years, and analysts do expect to see more growth moving forward with a forecast annual growth rate of 16.9% for the next five years. Given the strong growth estimate it is understandable why Wall Street continues to buy into the stock at its current valuation, but shares are currently priced for perfection and could quickly correct on any sign of weakness. If you are long the stock you are looking at a sizable gain, and your position may be out of balance versus the rest of your portfolio due to the massive gains in 2019. Take a close look at your position, and consider locking in some profits and lowering your exposure on this high flying stock. MA trades at $278.70 with an average price target of $300.55.
Tech giant Microsoft (MSFT) has continued to reward investors in 2019 with shares currently up 36.4% year to date and trading just below their all-time high. Microsoft’s ability to position itself as a clear leader in cloud computing has driven the stock in recent years, as traders reacted to annual earnings growth of 17.6% over the last five years. Microsoft missed out on the mobile revolution but capitalized on cloud computing and looking ahead analysts see additional earnings growth potential of 14.5% per annum for the next five years. The stock’s valuation is not insane, but with MSFT trading at 27 times earnings the stock is priced for perfection and at risk of a selloff. MSFT remains a solid long-term holding, but with the stock’s recent gains current shareholders may found their position has become too heavily weighted in their portfolio and some profit taking may be needed to reduce their exposure in the position. MSFT trades at $138.35 with an average price target. $150.70.
Coffee chain Starbucks (SBUX) has moved steadily higher over the last 12 months and the stock is up 50% year to date and trading just shy of its all-time high. The stock is currently trading at 35 times earnings. Profits are up 15% over the last five years, and looking ahead analysts forecast profits to rise at an annual rate of 13% for the next five years. The growth is strong enough to warrant holding the position, but given the recent gains and the current valuation investors ought to consider selling a portion of their position to lock in some gains and limit exposure just in case the company shows weakness during the latter part of the year and shares pull back from their current highs. SBUX is trading at $96.77, above its $92.28 average price target.
Republic Services (RSG)
Waste and garbage collector Republic Services (RSG) is trading just pennies below its all-time high after appreciating 24% in 2019. The stock is currently trading at 28 times earnings with profits expected to rise 9% per annum over the last five years. The waste sector is seen as a defensive play in volatile markets since demand for will continue to exist for waste removal. The industry has very high barriers to entry which makes leaders such as Republic Services a solid long-term holding, but the recent run up in the stock has pushed the valuation just a little too high and has likely resulted in the stock being over weighted in portfolios that hold the stock. The company posted mixed results in July with better than expected earnings and will not report again until late December. RSG trades at $89.35 with an average price target of $88.29.