From CNBC to Fox Business, television pundits will loudly proclaim that now is the time to invest in the stock of XYZ Corporation. Rarely, however, do these financial commentators tell you when it’s time to unload shares of XYZ Corp. Knowing the right time to sell a stock is as important as knowing when to buy…even for longer-term investors. In keeping with that theme, here are five stocks that you should probably be selling this spring.
Toyota Motor Corp. (TM)
The former king of auto sales in North America has fallen on hard times. Countless vehicle recalls and quality issues have turned this once reliable automaker into a risky investment. Toyota faces potential lawsuits and all of its safety issues could cost Toyota’s bottom line as much as $2 billion dollars. It’s hard to have much confidence in Toyota’s current management team. It appears that management knew about many of the problems that existed and did little to rectify them. Trust is a key component when investing in a company. Besides, Toyota is trading at 70 times forward earnings, and investors could find much better values in the market. Toyota is also trading at a lofty price-to-earnings ratio compared to industry peers such as Ford and Honda.
Wait! Before you assume that I’m crazy for recommending that you sell shares of Amazon, let me explain. I know that Amazon is one of the leading retailers in the United States and the company has continually reported excellent quarters with strong earnings growth. Amazon has a great balance sheet and is expected to grow sales at a 27% clip over the next five years.
So, why should you sell Amazon?
It’s purely a valuation call. Amazon is trading at nearly 50 times earnings estimates for the current year and at nearly 40 times next year’s earnings. Amazon is priced for perfection. The market is expecting Amazon to continue its streak of blowout quarters. Take a look at what happened to shares of Google (GOOG) when the search giant reported a great quarter and beat consensus estimates: Google’s stock was slaughtered because analysts expected Google to crush even the highest earnings estimate. Amazon may suffer a similar fate.
Now that the federal government is prosecuting investment banks and financial institutions for fraud; it’s only a matter of time before the ratings agencies draw the government’s ire. Before the financial crisis began, Moody’s gave AAA ratings to millions of securities that should have been given junk status. Regulatory agencies may find that the rating agency committed fraud by inappropriately evaluating securities. I would expect that Moody’s and S&P will lose their preferential status as the only game in town in the ratings industry.
AOL Inc. (AOL)
Investors that bought AOL during its initial public offering have received a nice return. Shares are up over 12% since the company’s IPO on November 24th. Now may be the perfect time to shed your position in the former tech giant. The problem with AOL is that the media firm has no earnings growth. AOL has to compete against Google and Yahoo (YHOO) for ad dollars. AOL earned 1 penny per share last quarter and revenue continues to decline. Subscribers, revenue, and free cash flow are all in a free fall. The five-year earnings growth rate is projected at negative 92%. There is no way that AOL can justify trading at $28 per share based on these trends. I would like to see a full year’s worth of earnings before investing in AOL. Until that time: Buyer beware!
Build-A-Bear Workshop (BBW)
Making your own stuffed animal was a novel concept, but the build-your-own teddy bear craze is dying. Revenues and profits have been on the decline over the past few years. Build-A-Bear lost $12 million dollars last year alone. The company is trying everything to increase shareholder equity from buying back stock to cutting costs. These moves appear to be too little and too late. Fad items come and go all of the time. Look at Heely’s (HLYS) and Krispy Kreme Doughnuts (KKD) for further proof. With tepid sales growth projected for the next five years, it may be time to turn bearish about owning shares of Build-A-Bear.
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What do you think? Are these stocks that would you sell or hold onto? Are there other stocks you’re dying to get rid of?