Breaking up is hard to do, and that’s just as true when it comes to investments as it is in love. Although Midas encourages you to have a long-term relationship with your stocks and shares, it is arguably just as important to know when to sell a stock as it is to know when to buy it.
Sometimes you have to bite the bullet and get rid of some cherished stocks. With the FTSE 100 up over 12 per cent this year, and many individual stocks within it up far more, this is one of those times.
Many of us who bought shares in underperforming household names in recent years are now sitting on profits that could be wiped away quickly, courtesy of some poor economic data or a change in sector sentiment.
Here are four shares that many people hold that have had a great run, but now look vulnerable to prevailing economic winds.
Holding them for the long term may still pay off (they are good businesses, after all) but if you’re sitting on a tidy profit now might be the time to use the money to pick up tomorrow’s treasures.
BAE Systems
Weapons giant BAE Systems has had a stellar few years, thanks to global increased spending on defence.
Taking a dive: Shares at BAE Systems, which helped to build the F-35 fighter aircraft (pictured), have suffered a fall in value
The defence darling is part of the Eurofighter Typhoon programme, exports combat and armoured vehicles worldwide, builds ships such as Type 45 destroyers and makes radar and missile systems. BAE also has a cyber and intelligence division.
All of these programmes are performing well and if you bought into this stock three years ago, you would have enjoyed a 120 per cent return. Recently, though, the stock has taken a slight dive off its highs and this might be evidence that the shine is coming off the sector.
The last set of results were excellent, with a £75billion order backlog demonstrating just how high demand is for BAE’s products right now. However, there are always issues to watch, and in BAE’s case they include a fall in free cashflow, thanks to acquisitions, as well as increased debt – now standing at £6.1billion. Order intake also dipped slightly.
The problem with BAE’s recent performance is that even tiny niggles could push it off its highs because investors’ expectations are so high.
Iain Pyle, from investment firm Aberdeen, agrees that although BAE ‘remains an excellent business’, at this level it needs to do more to continue to justify high ratings. ‘We are reaching the point where policy needs to translate into orders and earnings to justify material upside, so it is time to take some profit,’ he says.
Ticker: BA Traded on: Main Market Contact: www.baesystems.com
Next
This week has seen seismic shocks for many stocks in the retail sector after analysts at Deutsche Bank said they were taking a more cautious view on the plight of the UK consumer. But while the other stocks which the bank named as their ‘least preferred’ in the retail sector, such as Wickes and Kingfisher, saw shares fall, high street darling Next escaped a drubbing.
Next, which is well-regarded for its seamless transition from catalogue company to online retailer, hit the £1billion profit milestone this year. It is known for surprising on the upside, having upgraded its forecasts nine times in two years, while investors also love Lord Wolfson, the FTSE 100’s longest-serving chief executive.
Expensive: Next trades on 16.6 times forward earnings – an affordability measure that means it is 16.6 times pricier than the amount of profit it is expected to make this year
So why sell now? The clothing retailer’s shares are up almost 26 per cent this year and have doubled in the last five. But Dan Coatsworth, of DIY investment group AJ Bell, says that even though the company has continued to issue good news in more recent months, this hasn’t been greeted with a strong share price movement.
‘This suggests the scale of its earnings upgrades aren’t strong enough to draw in new buyers for the shares,’ he says.
That’s partly because the stock is expensive. Next trades on 16.6 times forward earnings – an affordability measure that means it is 16.6 times pricier than the amount of profit it is expected to make this year. That makes it dearer than many of its peers, with Marks & Spencer, for example, trading on just over 13.
Deutsche Bank has a Hold rating on the stock, but Midas goes further and suggests you sell some. As Coatsworth says, the company is at ‘the mercy of the consumer where any pullback in confidence could lead to lower sales’.
Ticker: NXT Traded on: Main Market Contact: www.nextplc.co.uk
Rolls-Royce
When your name is a byword for top-quality, you have to be careful not to slip up – and in recent years, Rolls-Royce has lived up to that solid reputation. The FTSE 100 company makes, not cars, but engines, including those which power Royal Navy submarines as well as aircraft.
Better-than-expected performance has seen the shares rise 525 per cent in the last two years and the firm should continue to do well.
Top-quality: Better-than-expected performance has seen the shares rise 525 per cent in the last two years and the firm should continue to do well
Longer-lasting and more reliable engines mean fewer overhauls and lower costs for Rolls-Royce, and the company has hit the jackpot when it comes to contract renegotiations, too, meaning it isn’t too impacted by inflation.
It has also weathered several expensive issues, including a corruption scandal and problems with the Trent 1000 engine which caused redesigns. The costs of these issues have now largely been met, putting the Roller on a firmer financial footing.
So why sell now? Because the share price has been soaring and some experts believe they could take a dip sooner rather than later.
The company’s shares are currently at £10.76 and Nick Cunningham, defence and aerospace analyst at Agency Partners, reckons that using valuation methods derived from historic stock performance, they will be worth less than this in 2030. He has a Hold recommendation on the stock and points out that the aerospace industry is highly cyclical. In a recession, share prices in the sector will be hit even if profits aren’t.
Rolls-Royce may buck the trend, but if you’ve made huge profits on this stock you may not wish to hang around to see.
Ticker: RR Traded on: Main Market Contact: www.rolls-royce.com/
Greggs
Everyone loves a sausage roll, except when the weather is hot – and this summer has thrown the chain off-kilter. The firm issued a flaky trading update, blaming the weather for lower sales and says operating profit for this year will be ‘modestly below’ that in 2024. Interim figures brought no tastier news, with profit 14 per cent down and pressure on margins.
Off-kilter: Poor news has hit the Greggs share price and made analysts question whether Greggs expansion plans will work
Poor news has hit the Greggs share price and made analysts question whether Greggs expansion plans will work. Mark Crouch, market analyst at eToro, called the ‘sudden stumble’ a red flag. ‘Management blames hot weather for weaker sales, but that doesn’t account for a 50 per cent collapse in market value. The more plausible culprit is the timing of Greggs’ expansion strategy, stretching margins, just as the consumer picture turns more fragile.’
Greggs is doing all it can to recover, including signing a deal with Tesco for ‘Bake at Home’ sausage rolls, but with evening trading failing to pull in the punters and a fear that new store openings will simply cannibalise sales from existing outlets, it has work to do to rebuild investor trust.
Ben Hunt, at Panmure Liberum, has a Sell rating on the stock and Midas agrees. If you’ve clocked up profits in Greggs, take them.
Ticker: GRG Traded on: Main Market Contact: www.greggs.com/
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