Selling shares is just as important as buying them. Yet many private investors give too little attention to deciding when to sell. So how do you do it? Discipline is important, as is the ability to recognise when a stock is overvalued and hence vulnerable. In these fickle markets in particular, it is crucial not to fall into the trap of becoming too greedy. Take thsi stock:
Turkey of the week: Chloride Group (CHLD), tipped as a BUY by Charles Stanley
Chloride is Europe’s second-largest provider of uninterrupted power supply systems, with a 6% share of the $6.5bn global market. Along with equipment sales, Chloride provides maintenance services that now represent around 35% of turnover.
The market is expected to grow by around 6% a year for the next three years, driven by the need for guaranteed power. Recently, the industry has seen a spike in demand due to unreliable energy provision in Western economies, as illustrated by blackouts in New York, Italy, and on the London Underground. Key applications are in IT data centres, hospitals and sites where safety is crucial. Many developing nations, such as India and China, lack stable electricity networks. Power cuts are an everyday event, making it harder to set up local high-tech industries; even call centres need resilient power sources. So Chloride’s markets are extremely buoyant, and the company is certainly benefiting. But investors must remember that this fickle industry was hit hard after the dotcom crash.
So what is the stock worth? For a cyclical business like this, with its price pressures, I would value Chloride on a 15 times 2007 p/e ratio – around 110p per share. So why are the shares trading on a p/e of 25? I believe this is due to the mergers and acquisitions frenzy. In October, Schneider, now the sector’s top player, acquired APC for $5.5bn, a sales multiple of 2.1 times. Applying this same valuation to Chloride’s projected turnover implies a price of 167p per share.
Therefore, it seems that most, if not all the upside from any potential acquisition is already in the price. So if no bid transpires, there is a strong chance that the shares will fall back to their fair value of 110p. And even if a takeover does occur, the purchase price is unlikely to be much greater than current levels. So shareholders should take profits and recycle the proceeds into other more attractive areas. In fact, the chief executive has just done so by selling 1.55 million shares in February at 165p.
Recommendation: SELL at 159.75p