Overall I can’t justify owning Netflix for a few reasons. Its valuation is a huge red flag to any value investor. The historic price action of Netflix suggests that after significant moves like this one there is going to be a pullback. Finally, if you are one of the lucky ones to have a gain in this position I would advise to take it and run. Put it in a company with a more attractive valuation, a less competitive atmosphere, and less volatility.
Buy This Stock
While it can be tricky determining when to sell a stock in this market it can be even more daunting trying to find a stock to purchase for a long term value play. Indeed my own buy list has been getting smaller and smaller as valuations continue to rise along with the market.
However, one stock is still looks very attractive to me as I’ve continued to add to my personal position over the last year for an almost 50% gain. American International Group, Inc. (NYSE:AIG) has made a turnaround the likes of which belong in the annals of economic history.
In the interest of time I’ll summarize some of the more attractive features of this company.
Management: In August 2009 Bob Benmosche took the helm of American International Group, Inc. (NYSE:AIG). Since then they have repaid all $182.3 billion borrowed from the federal government. Divesting peripheral assets and refocusing on the core business has proven successful and investors are anticipating stock buy backs or even a dividend announcement coming in the next couple quarters.
Valuations: Looking at some key valuations (Figure 4) we can see that AIG looks very attractive.
Figure 4:
| Valuations | American Insurance Group |
| P/E | 2.50 |
| Price/Sales | 0.80 |
| Price/Book | 0.56 |
| Net Profit Margin (TTM) | 39% |
On top of those numbers American International Group, Inc. (NYSE:AIG) sports a PEG of 0.47, improving RoI and RoA, as well as a tangible book value per share of almost $69.
Future: AIG has an absolutely huge footprint. This established giant has also freed itself from government regulation with the repayment of TARP. Finally, the business model has fundamentally shifted from risky insurance instruments over to more safe and predictable assets.
AIG has been one of my top picks for over one year now and a nearly 50% gain. But this is just the beginning. This is the proverbial Phoenix rising from the ashes and investors would be wise to pay attention to the legendary recovery that is still in the early stages.
CONCLUSION
The market is always changing and as a result so should your portfolio. It never hurts to take profits in stocks that have had a great run. Once valuations become too rich for the long term value investor it only makes sense to sell or put on a trailing stop. The same fundamentals that attract buyers to a stock are also the same fundamentals one should watch in order to determine when a position no longer fits that value criteria. We all know it’s always best to buy when stocks are inexpensive, but we must also observe the opposite and sell when stocks appear expensive.
The article What to Buy and Sell as the Market Climbs originally appeared on Fool.com and is written by James Catlin.
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