2 FTSE 100 stocks I’d sell in November

G A Chester discusses why he’d sell these two FTSE 100 (INDEXFTSE:UKX) stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Even the best businesses can become overvalued, based on the particular value parameters you work to. In such situations, you can either keep raising your valuation threshold as the market rates the stock more highly — and thus continue to hold or even buy more — or stick to your valuation discipline and sell.

I favour the latter. Here’s why I’d sell two FTSE 100 stocks on valuation grounds at their current levels.

Top-of-the-cycle valuation

Housebuilder Berkeley (LSE: BKG) was founded in 1976 and is a company I admire for its prudent progress under its highly experienced management team led by founder and chairman Tony Pidgley.

Berkeley has delivered fantastic share price gains and sackfuls of dividends since the financial crisis. However, this is a notoriously cyclical industry and while the company trades on an undemanding price-to-earnings (P/E) ratio, this is common before a downturn. As is its current top-of-the-cycle operating margin in the high 20s and price-to-book (P/B) ratio in the 2.5 region.

At a recent share price high of 4,000p, Berkeley’s P/B was 2.6, which compares with a peak P/B of 2.7 in 2007. Then, as now, the company saw a number of uncertainties and risks in the market but had a strong balance sheet and expected to be a resilient performer. However, business resilience and share price resilience are two different things. Berkeley’s shares lost over two-thirds of their value from peak to trough between summer 2007 and summer 2008.

The company’s focus on London and this week’s rise in interest rates add to my concern about the current valuation.

Follow the money

Finally, Berkeley’s shrewd boss Mr Pidgley has, as the Daily Telegraph wrote in 2009, “gained a reputation for calling property cycles correctly — liquidating assets ahead of the late 1980s housing crash, shifting resources into the blossoming city centre market in the 1990s, and pulling back from volume housebuilding in 2004.”

This year, he’s been selling Berkeley shares with a vengeance: £31.1m in April, £26.8m in September and £28.9m last month. Other director sales include the chief executive and his wife for a combined £37.1m.

In vogue but not with me

Fashion house Burberry (LSE: BRBY) is a company I admire for the strength, longevity and global appeal of its brand. Indeed, it possesses qualities Warren Buffett looks for in a business. My rationale for rating it a ‘sell’ is rather more straightforward than for Berkeley.

I believe Burberry’s 12-month forward P/E of over 22, at a current all-time high share price of a bit over 1,900p, is simply too expensive. Forecast earnings growth of 9% over the period gives a price-to-earnings growth (PEG) ratio of 2.4, which is significantly above the PEG ‘fair value’ marker of one. A low 2.3% dividend yield also points to overvaluation in my book.

I believe Burberry’s shares offer great long-term value when trading on a forward P/E in the teens, as they have not infrequently in the past. However, as it is, I see more attractively valued stocks in the market today and reckon it likely Burberry will be available on a cheaper rating at some point in the future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »