There are many aspects of investing that can be difficult for investors to master. For example, having the patience to run a game-changing business through wild hesitation and allowing your investment thesis to unfold over time can be a daunting task.
But arguably the hardest thing to invest is deciding when to sell and whether to make a profit or take your pieces. While there is no dearth of viable reasons for selling – for example, for tax purposes, management changes, or a personal emergency requiring capital – the most logical reason to part with a stock is when your original investment thesis no longer holds. .
The following three ultra-popular stocks have all made huge gains for their shareholders. However, now is the time for investors to book their profits and seek greener pastures.
Some of you might call this idea a little crazy, but I think it’s time for investors to lock in some or all of their earnings on the 2019 Coronavirus Disease Superstar (COVID-19) Modern (NASDAQ: mRNA). Shares of the company have risen 174% year-to-date, and they have climbed nearly 1,400% since COVID-19 became a point of interest in China in late 2019.
The obvious reason Moderna has been so successful is the company’s COVID-19 vaccine cleared for emergency use, mRNA-1273. In the phase 3 COVE trial, which presented data in late November 2020, mRNA-1273 demonstrated vaccine efficacy (VE) of 94.1% and was 100% effective against severe forms of the disease. With the exception of Pfizer/BioNTech Moderna’s COVID-19 vaccine offers one of the highest EVs in the entire treatment landscape. This success is expected to translate into sales of $ 19.2 billion in 2021. This would make mRNA-1273 the third best-selling drug in the world, behind the Pfizer / BioNTech vaccine (BNT162b2) and AbbVieit’s Humira.
So why sell if the company’s vaccine has been so successful? The first thing to consider is that the COVID-19 treatment landscape is going to become more crowded. Both Johnson & johnson and AstraZeneca plan to increase production of their respective vaccines, and Novavax appears to have a very good chance of obtaining emergency use authorization for its investigational vaccine, NVX-CoV2373 in the coming months. Unsurprisingly, Wall Street expects Moderna sales to decline 16% in 2022 to $ 15.4 billion.
Second, there are obvious valuation concerns. While Modena isn’t exactly expensive on a price / earnings basis (compared to the Wall Street earnings per share consensus in 2021), it will be nearly six times the peak in sales for mRNA-1273. A sales spike multiple of six is often the highest for most biotech stocks.
And third, mRNA-1273 is the only revenue generating product of the company. The mutability of the virus, along with increased competition, makes Moderna a risky bet with a market cap of $ 115 billion.
Another exceptionally popular stock that it’s time to take a profit on is the video game and accessories retailer. GameStop (NYSE: GME). The company’s shares are up 794% year-to-date and more than 3,900% in the past year.
While I am clearly not a fan of GameStop, I can recognize that it has made people (i.e. retail investors) a lot of money. As of mid-January, no publicly traded company had a higher short interest, relative to its free float (tradable shares), than GameStop. This led to an epic short squeeze that took the company from around $ 20 a share to almost $ 500 in a matter of days.
But while most short squeeze contenders surrender their winnings fairly quickly, GameStop was able to hang on to a good chunk of their raise. The reason is simple: he was able to raise a good amount of money. GameStop’s balance sheet was not a mess before the pandemic, and management had the flexibility to sell stocks at inflated levels to raise the capital needed to pay off all of the company’s debt. In April, GameStop raised $ 551 million in gross proceeds by selling 3.5 million shares, and it rose $ 1.13 billion in June after selling an additional 5 million shares. Without debt and abundant liquidity, GameStop is not at risk of bankruptcy, and it has enough capital to effect a business transformation.
As with Moderna, you are probably wondering “Why sell?” The number one reason (cover your eyes, meme traders) is that GameStop is still a work in progress. While its e-commerce sales jumped 191% in fiscal 2020, it also saw its net sales drop 21.5%. GameStop was just too late to recognize that gaming had gone digital, and now it’s stuck with thousands of physical game stores, many of which are underperforming. GameStop will be busy closing stores for years to cut spending and get back into the profit column once again.
The other big reason it’s time to book profit is that the potential for a short squeeze just isn’t appealing. Even though its short interest is still much higher than your typical stock – 8.22 million shares held short, compared to a free float of 56.41 million shares – short shares held have fallen by 31 % since the end of May. In other words, short sellers have hedged and the share price fell. The initial catalyst that got the retail industry so excited about this stock is simply not there anymore.
Last but not least, now is a good time to consider locking in the gains on the movie channel. AMC Entertainment (NYSE: AMC). AMC is the best-performing stock since the start of the year (minimum market cap of $ 2 billion), gaining around 1,500%.
Like GameStop, retail investors have dedicated their time and attention to pursuing a potential downsizing of AMC. Although they did manage to do so in late January after AMC was able to save itself from bankruptcy by selling shares and issuing high interest debt, the rally in late May / early June had nothing to do with it. with uncovered coverage and everything to do with misinformation on social media is pushing up the share price.
Why sell? The logical reason is that the fundamentals always matter. Before the pandemic, AMC had never been valued at more than a $ 3.8 billion market. Back then, it was profitable, it had much less debt than it does today, and it controlled its fate of film exclusivity. Today, AMC is losing money, has over $ 3 billion in net debt and $ 473 million in deferred lease obligations, and is wasting screen time and / or revenue to profit. studios with streaming capabilities.
Another reason to pack your bags on AMC is that the short thesis no longer makes sense. Between the end of May and the end of June, the shares held short fell from 102.3 million to 75.5 million. As more than a quarter of the outstanding short shares were hedged, AMC’s share price declined. It took a social media disinformation campaign and the purchase of hundreds of millions of shares by retail investors to push AMC to $ 72 for a brief moment. Imagine what a tiny impact covering some of the remaining 75.5 million shares will have on the price. And remember, short sellers don’t have to hedge anytime soon, which kills the idea that a squeeze is imminent.
If you need another good reason to quit AMC, look no further than the noted disinformation campaign. Over the past three weeks, I have highlighted the mountain of unfounded hype and lies that AMC’s retail investors have been spreading to prevent this pump-and-dump program from crumbling. With AMC’s share price now over half of its all-time high, it’s clear people are finally seeing this scheme for what it is.
If you’ve made any money on AMC, congratulations. It’s time to save those wins and look elsewhere before you lose it all.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.