Selling Without Regret

11/04/2010 4:35 pm EST


Jim Jubak

Founder and Editor,

I’ve owned Middleby (Nasdaq: MIDD) in my Jubak’s Picks portfolio since May 20, 2008, and I think it’s now time to take some profits.

Nothing unusual about these shares in the company, which designs, manufactures, and sells commercial food service and food-processing equipment.

And that’s exactly the point: At this stage of the rally, I’d like to keep close watch on valuations and sell individual stocks when a specific price seems to be getting out of line. I’d rather leave a few dollars on the table now than risk a major loss.

So, how do you tell if a stock is a sell now rather than a rocket with more gains ahead? I’d suggest taking a look at historical valuations.

Middleby beat Wall Street estimates by eight cents a share when it reported earnings for the second quarter on August 11. Revenue climbed 9.3% from the second quarter of 2009.

The stock then took off with the rest of the market in late August. From a low of $53.28 on August 24, shares climbed to $76.83 as of the close on November 2 for a gain of 44%. Shares fell almost 4% on November 3.

That rally drove the stock’s price-to-earnings ratio of 21x trailing-12-month earnings per share and 17.2x projected earnings. That compares with a five-year high P/E ratio of 29x and a five-year low of 6x.

The Wall Street consensus projects 8.6% earnings growth for 2010 and 14.8% earnings growth for 2011.

All this suggests that on historical comparisons, Middleby is expensive now—and that at this price, you’re betting that the Federal Reserve’s $600-billion program of quantitative easing is going to work to increase growth in the economy. (For more on the global market reaction to the Fed’s move, see this post.) 

I’d like to buy the shares back at something like 14.8x projected 2010 earnings of $3.74 a share, or about $55 a share. (That’s a multiple equal to the stock’s projected 2011 growth rate.)

So, as of November 3, 2010, I sold Middleby out of Jubak’s Picks with a gain of 29.7% since I added it to the portfolio on May 20, 2008.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio here.

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