Do you sell these three stocks?

When nominating stocks to consider selling in 2020, it’s easy to focus on soaring companies, conclude they are overvalued and recommend profit taking. Only to watch strong-momentum stocks fly higher and be reminded that what counts most is future value, not past prices.

CSL and Cochlear, for example, look pricey and are hard to buy at current prices. But would I sell them if they were in my portfolio? No. Their exceptional quality and prospects warrant demanding valuations and a long-term investment approach.

Over the years, I’ve found the hardest sell ideas are not in soaring tech stocks or cyclical companies exposed to slowing industry conditions. It’s when quality, well-run companies become too expensive and require profit-taking. Stocks you would buy back at the right price.

Here are stocks to consider taking full or partial profits on in 2020.

Before I discuss them, a few caveats. Always seek financial advice or do research of your own before selling stocks based on investment newsletters or newspaper stories. Selling stocks can have Capital Gains Tax (CGT) implications.

Also, consider the implications of selling stocks from a portfolio perspective. An investor with a portfolio heavily weighted in bank stocks may have more reason to sell, to reweight asset allocations, than another who is underweight bank-stock exposure.

Consider whether to “lighten” exposure to a star stock or sell completely. Reducing exposure to stocks in stages as their price rises, rather than one quick sale, might make sense. Moreover, have plans to put profits on star stocks to work, instead of parking them in cash for too long.

Caveats aside, here are six to consider taking profits on in 2020. Each is included mostly for valuation reasons rather than any significant operational problems.

1. JB Hi-Fi (JBH:ASX)

I’ve been a fan of the electronics and white-goods retailer and have written about it positively several times over the years. JBH repaid the faith with a five-year annualised return (including dividends of 25 per cent) over five years.

That’s a remarkable performance for any company, let alone a retailer. A chorus of commentators said retail stocks should be avoided given our slowing economy and rising e-commerce competition. I took a contrarian view on retail in the past few years, believing the competitive threat from Amazon was overstated, at least in the near term.

JBH has soared from a 52-week low of $20.30 to $38. The one-year total return (including dividends) is 88 per cent. To its credit, JBH keeps surprising the market and growing in a challenging arena – a terrific management achievement. The company is superbly positioned to benefit from long-term growth in gadget demand.

But every stock has its price. At $38, JBH is expected to yield 3.7 per cent, consensus forecasts show. An average share-price target of $25.39, based on the consensus of 12 broking firms, implies JBH is overvalued at the current price.

I’m not as bearish, but agree that JBH has run too far, too fast for now. I can’t see much joy for retailers in 2020, even with two more interest-rate cuts, and believe any gentle upturn in the sector is already priced into JBH.

I also expect a greater competitive threat from Amazon and Australian retailers that sell electronic goods online. Thus, some profit taking in JBH – one of this market’s great retailers – is warranted.

JB Hi-Fi

Source: ASX

2. Woolworths (WOW:ASX)

Including Woolworths in this list is consistent with my view of challenged retail conditions in 2020. The supermarket giant has starred this year with a 34% total return – a great performance given Australia’s slowing economy and rising competition in food staples.

This time last year, I included Woolworths’ arch-rival Coles as one of my top ideas for 2019. Twelve months later, I suggest taking profits on Woolworths and Coles after strong gains.

Woolworths is a tough stock to sell. As Australia’s largest retailer, it has scale advantages, a dominant market position, strong management and a healthy balance sheet. The stock also has important defensive qualities if the economy sours further in 2020.

At a micro level, Woolworths has much to gain from store refurbishments, new store formats, and service technology that reduces costs. Less considered is the incredible amount of customer data Woolworths collects and the long-term value of this information.

These and other initiatives should gradually expand Woolworths’ EBIT margins and profitability. Exiting its troubled hardware and petrol businesses, and spinning off its pubs and liquor stores into a single entity (Endeavour Group) is smart. The potential demerger, expected in 2020, simplifies Woolworths and increases its focus on lower-risk food operations.

The question is whether that good work is fully priced into Woolworths after its rally this year. At $38.28, Woolworths is on a forward PE multiple of about 26 times, according to consensus analyst forecasts. That’s high for a supermarket business facing ongoing price deflation and rising competition from online rivals, international chains and independently owned stores.

An average share-price target of $29.42, based on the consensus of 12 broking firms, suggests Woolworths is overvalued at the current price. I’m not quite as bearish, but believe some profit taking in Woolworths is warranted after its stellar performance last year.

Woolworths

Source: ASX

3. Vicinity Centres (VCX:ASX)

I remain bullish on the long-term prospects for “fortress malls” – the giant shopping centres that are becoming mini-CBDs as they add more lifestyle and personal services. Vicinity owns half of one of Australia’s great fortress malls, Chadstone Shopping Centre in Melbourne.

However, Vicinity and other retail Australian Real Estate Investment Trusts (A_REITs) also own lesser-quality properties that are likelier to suffer from easing occupancy rates and rents when leases are renegotiated. Mid-tier retail properties have a challenging outlook.

Moreover, some large anchor tenants, notably department stores, are shrinking floor space or exiting underperforming stores. The best fortress malls should have fewer problems re-leasing this space at comparable rates, but mid-tier centres will have a painful transition.

I see much long-term upside for fortress malls as they build hotels, residential and office developments, and find new income streams from retail data and other innovations. But it all takes time and won’t be enough to compensate for a deteriorating retail climate in 2020.

An average share-price target of $2.91, based on the consensus of 10 broking firms, suggests Vicinity is moderately overvalued at the current $2.64. The risks in the next 12-18 months for Vicinity and other retail property owners are skewed to the downside, and the local REIT sector generally is vulnerable to interest rates hitting a trough next year and expectations starting to build for an eventual upturn in rates.

Vicinity Centres

Source: ASX