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How to Know Exactly When to Sell a Winner

By Mike Barrett, analyst, Extreme Value
Wednesday, February 3, 2016

Since then, the market has pulled back more than 7%. Some of the big winners in your portfolio may not be performing well lately. You might be thinking it's time to lock in profits – after all, some profit is better than no profit.
But as I'll show you today, it's important to act rationally and logically and not to let your emotions get the best of you.
In that essay, I shared the story of the most successful recommendation in Extreme Value's 13-year history: giant wine producer and beer importer Constellation Brands (STZ).
Constellation Brands is a World Dominator when it comes to alcohol. It's the third-largest beer supplier in the U.S., with brands like Corona and Modelo. It's also responsible for top-selling wine brands like Robert Mondavi and spirits brands like Svedka vodka.
Last month, Constellation reported results for its fiscal third quarter ending November 30, 2015. The results were excellent, and management increased its outlook for full-year earnings and free cash flow.
In addition to being the world's leading producer of premium wines, Constellation owns the exclusive right to import, market, and sell six Mexican beer brands in the U.S., including the No. 1 imported regular beer (Corona Extra), the No. 1 imported light beer (Corona Light), and the No. 2 imported regular beer (Modelo Especial).
The wine business is doing well. The beer business is booming.
Net beer sales for the first nine months of fiscal 2016 grew 11%. Management now expects full-year growth to be 12%-14%.
To accommodate growing demand for its portfolio of Mexican beers, Constellation announced an additional 2.5-million-hectoliter expansion of its main brewery in Nava, Mexico, as part of its third-quarter report (1 hectoliter = 26.42 gallons).
When complete in 2018, the Nava brewery will expand to 27.5 million hectoliters – almost three times larger than when Constellation acquired it in 2013. The company also announced plans for another 10-million-hectoliter brewery closer to California in Mexicali, Mexico.
Provided that future demand growth meets management's lofty expectations, these capacity additions will enable Constellation to continue growing revenue and profits at strong rates. Rising revenue and profitability, should they materialize, are also likely to keep pushing the stock price higher.
As of yesterday's close, we're sitting on a 623% gain on Constellation in our Extreme Value portfolio. When a stock becomes a big winner like Constellation has, fighting your emotions becomes a big challenge.
If the stock suddenly starts declining, your emotions tell you to sell and lock in profits. If it starts surging, you wonder if you should sell amidst the sudden euphoria, particularly if the broader market has been on an extended, multiyear run.
Don't give in to temptation or act irrationally. Avoid prematurely closing a big winner by asking yourself these two questions:
  1. Is the original investment idea still valid?
  2. Have the shares become fully valued?

Constellation's growth and profitability have exceeded the expectations we set back in 2011. There are currently no indications that the business will stop performing well. The original investment thesis is still valid.
At a recent price of around $150 per share, STZ is valued around 25 times our estimate of 2017 stabilized free cash flow. That's not cheap enough to recommend buying STZ shares. It's now approaching our estimate of intrinsic value – about 30 times free cash flow.
Shares are not fully valued, but they're getting close. We'll continue to watch this one closely.
In sum, once you have a big winner, don't put it on autopilot. Regularly ask yourself if the reason you bought it is still valid and if the shares are fully valued.
Asking these questions will take emotion out of the decision-making process as much as possible and help you avoid selling a big winner prematurely.
Good investing,
Mike Barrett

Further Reading:

You can get more tips from Mike on successful investing right here:
Successful Investments Start With These Five Questions...
"I have read thousands of annual reports in my investing career. Over time, I've developed a system that helps me quickly assess if a company is worthy of further study."
One of the Most Important Lessons When Buying Stocks
"You're not going to succeed in the stock market by just buying the world's best businesses... "

Market Notes


Today's chart is a look at a bubble few people are talking about...
Stansberry Research founder Porter Stansberry has been warning readers about the problems facing the auto-loan market for months. Today, subprime lending – or loans to higher-risk borrowers – makes up nearly half of all auto loans. In other words, far too many people are buying cars they can't afford. These loans will go bad. When they do, the industry will be completely devastated – every bit as bad as when the mortgage bubble popped.
To get an idea of just how bad this problem is, we turn to Santander Consumer USA (SC), one of the largest subprime auto-finance companies in the U.S. Santander lends money to people with no money and no credit. As you might guess, these borrowers are having a hard time paying off their loans... and Santander lets its borrowers defer up to three of their monthly payments.
It's no surprise Santander is currently one of Porter's top-performing short recommendations. As you can see from the chart below, shares are getting clobbered. The stock is down more than 60% over the past six months... and hit a new all-time low yesterday. It's the latest sign of the bubble Porter has been predicting, which will only get worse...

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