Analysts love to recommend shares that have already surged. They feel comfortable touting companies that are "in favor" and that show positive share price momentum. An example of this type of play is shown below.
The author of the blurb touted Leggett & Platt (LEG) as a "forgotten" issue even though it was up greater than 80% in the past three years. By definition, that means LEG has not really been flying under the radar. The question then becomes: "Can a stock that's almost doubled still be a good buy?" That is always possible. It's the stuff of dreams for momentum traders.
To determine future prospects you'll need to know the value of the shares in relation to where they've traded historically. Leggett & Platt was a great buy during 2010 - 2014 when the shares traded at price-to-earnings (P/E) multiples of 11.6x - 17.1x. The highest of those multiples was not indicative of speculation as it occurred due to lower earnings, rather than an enthusiastic stock price run-up.
As of Dec. 20, 2014, LEG was commanding one of the highest valuations in its recent history. Its yield, at 2.95%, was far below its 4.6% average during the latest four years. And company insiders were not acting bullish. They sold personal holdings 27 times from February through October this year. There were zero insider buys.
At 2:55 p.m. on Tuesday, Dec. 23, LEG was trading for $42.19. LEG appears overpriced. A regression towards a more normal 16x P/E would only support a 12-month target price of $34.40, even if next year's, perhaps optimistic, earnings estimate of $2.15 per share plays out as projected. LEG has not been a premier growth stock -- EPS were $1.57 in 2006 and $1.54 in 2013.
What good is a 3% dividend if the shares generating that yield decline by 18%?
It's okay to listen to opinions from all sources. Smart investors, however, need to question assumptions before blindly assuming an expert recommendation is worth following. Buying individual stocks right after large run-ups is a dangerous game. Wishing you'd been on board for what just finished happening is normal. Never forget, though, that you can't buy past performance.
If you own Leggett & Platt consider selling. If you were thinking about getting in on strength, think again.
At the time of publication, Price had no position in LEG.