illustrate later, there are many levels of overvaluation, and numerous outcomes that can happen after it occurs.
Kimberly Clark Corp (NYSE:KMB)
Genuine Parts Company (NYSE:GPC)
The Yield is Too High to Sell
Omega Healthcare Investors Inc (NYSE:OHI) presents a real dilemma regarding its current valuation. Due to the company’s high-yield, which was my primary attraction to investing in this Healthcare REIT, I am reticent to sell it at its current moderate overvaluation. Instead, I am willing to accept some volatility in order to continue to be able to harvest its above-average and growing yield. For an additional point of clarification, look closely at the graph and the fair valuation metrics (note that when evaluating REITs, FFO is used in lieu of earnings). If Omega Healthcare’s price was to fall to its income justified valuation line (the pink line) by year-end, it would still be above my current cost basis (the yellow line).
Consequently, the current moderate overvaluation does not justify an outright sell, in my opinion. However, I would not be willing to make new purchases at these levels either. Some would argue that if a stock is not a buy, then it should be an outright sell. I disagree on the principle that a portfolio is like a bar soap, the more you handle it the smaller it gets. Later I will present examples of the potential pitfalls of acting too hastily regarding buy or sell decisions.
Omega Healthcare Investors Inc (NYSE:OHI)
Examples of Potential Undervalued or Fairly Valued Replacements
Even though the market has gone on such an incredible run recently, not all stocks have moved into overvaluation territory. The following is a representative list (not a complete list) of several companies that appear undervalued based on fundamentals that might be worthy of a more comprehensive due diligence effort. To be clear, I’m not representing these as buys, rather I am representing them as candidates for closer scrutiny. My point in showing them is to illustrate that even in this, what many believe to be an overheated market, there’s plenty of fair value to be found if you look closely enough.
Coach, Inc. (NYSE:COH)
Lockheed Martin Corporation (NYSE:LMT)
Community Trust Bancorp, Inc. (NASDAQ:CTBI)
AFLAC Incorporated (NYSE:AFL)
Air Products & Chemicals, Inc. (NYSE:APD)
Lessons Learned (Maybe) From Past Behavior
One of the great advantages of possessing a powerful research tool like F.A.S.T. Graphs™ is the opportunity it provides to revisit past behaviors and actions. The premium version allows the user to mark past buy and sell decisions, and review them years later (the green and red dots on the graphs). In my own experience, I find it very useful to review past decisions with the objective of learning from my past. Although I’ve made many investing mistakes in the past, I regret none of them because I always did my homework and applied my best judgments given what I knew at the time.
EMC Corporation (NYSE:EMC)
Although not a dividend growth stock, I present EMC Corporation (NYSE:EMC) as an example of dangerous overvaluation to the extreme, and as a classic picture of a true bubble valuation. Notice that I purchased the stock in August 1995 (the green dot) when price was aligned with fair value (touching the orange line). Approximately 2 and three-quarter years later, I sold what amounted to 1/5 of my position, which generated all of my original investment, plus a reasonable profit. Nevertheless, as it turned out, I was leaving more money than I thought possible on the table, even though the decision was sound long-term (note that by 2002 the price had fallen below my first sell).
At this point, I was playing with proverbial house money and I sold another 1/5 of my original position at a substantial profit. This second sell alone generated a pure profit which was almost 4 times my original investment. Now I was convinced that the stock had peaked and was poised to liquidate my remaining shares.
However, the appetite for tech remained at a fevered pitch, and I held on, only to watch the stock almost triple from my last sell. My third sell alone netted more than 10 times my original investment, and my fourth sell a similar number. My fifth and
