Its not always easy to know when to sell a stock: cheap stocks can get cheaper, while pricey shares can keep rising.
When AbbVie proposed an offer of 53.20 per share for Shire last year, I thought it was time to sell.
Clearly, I was wrong: barely six months later, the shares have recovered from the post-AbbVie drop and are setting new record highs, at more than 55.
Trading on a forecast P/E of 20, Shires valuation clearly does depend on earnings growth from new products or acquisitions. Yet the companys track record suggests this is realistic: sales have grown by 11.6% per year since 2010, while an operating margin of 28% has helped to build net cash of $2.9bn.
Id probably hold on for a little longer.
Shares in Standard Chartered have put on a surge following the appointment of new chief executive Bill Winters, and have climbed nearly 15% over the last three months.
However, analysts are forecasting an 11% dividend cut for the current year, and no-one yet knows what problems Mr Winters might find when he starts work in May.
Although Standard Chartered looks cheap, with a 2015 forecast P/E of 10.7, the banks return on equity a key measure of profitability fell from 11.2%, to 7.8%, last year. Halting and reversing this decline could take time.
Petrofac shares fell by 13% when markets opened this morning, after the firm admitted that losses on its problematic Laggan-Tormore project in Shetland will be even worse than expected.
The firm booked a $230m loss on this project in 2014, and now says that a greater level of rectification and reinstatement work than expected, combined with further delays, mean that Petrofac will have to recognise another $195m loss on this project.
The problem is that Petrofac took direct responsibility for the construction phase of this project, something it usually subcontracts. The result has been disastrous.
Even before todays news, I was considering whether I should sell my Petrofac shares: I reckon a dividend cut is increasingly likely, and am not convinced the companys finances are as strong as they should be.
Petrofac has not generated any free cash flow for the last three years, and todays news is unlikely to help the firm to solve this problem: the losses being incurred on Laggan-Tormore are real cash, not just accounting write-downs.
Petrofac has moved from a net cash position of $228m to net debt of $1.3bn in just two years. Although the firms record $18.9bn order backlog is encouraging, Im concerned by the apparent lack of cash generation.
I will probably wait a little while to see if the shares bounce back from todays fall, which was much bigger than I expected, but Petrofac remains on my sell list.
A better buy today?
If you’re looking for new buys in today’s volatile market, careful analysis is required.
One opportunity recently unearthed by the Motley Fool’s market-beating experts is an unconventional UK retailer.
The company in question has doubled its profits since 2011. However, the Fool’s analysts believe this company is just getting started — and think that sales could rise by 200% over the next five years!
To find out more, download your FREE copy of “3 Hidden Factors Behind This Daring E-commerce Play“ today.
There’s no obligation: just click here now for immediate access.
A Fast-Growing Company With Breath-Taking Potential
This small-cap business looks all set to benefit from a market worth an estimated 4 billion a year as it starts rolling out the innovative new product its developed.
In fact, our analysts think its sales could DOUBLE over the next few years perhaps even more!
To find out the name of this company which could help to power your portfolio towards serious gains click here to read our exclusive analysis for FREE!simply click here to get your FREE Small Cap report now!
Roland Head owns shares in Petrofac and Standard Chartered. The Motley Fool UK owns shares of Petrofac. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.