Deciding to sell a stock is often harder than deciding to buy it. Selling our shares in Harley-Davidson (NYSE:HOG) provides a good example.
Since the US election, investors have rewarded companies with a nationalist bent. It doesn’t get more flag waving than Harley. Indeed, the company’s share price has risen almost twice as much as the overall market since Donald Trump’s election.
Sentiment that Harley’s core customer base will fare better under the new administration, combined with optimism around its new engine redesign, has pushed Harley’s share price to a level that reflects fair value.
Yet when we determined our estimate of fair value, it did not rely on a Trump bump. A lower US tax rate and protection from foreign competition would be good news for Harley.
Our valuation was ground in the theory that the strength of Harley’s franchise would eventually outweigh negative forces like a weak Japanese Yen and increased competition.
Hence the dilemma. We can easily convince ourselves that, since our original investment thesis has yet to play out, we should hold on to our shares. If we get lower tax rates, less competition and the cyclical rebound we were expecting, surely the shares will trade much higher than today?
Perhaps. As a general rule, however, I think it best to sell whenever the market quotes a price equal to fair value, regardless of whether a thesis has played out. Harley’s recent history suggests a turnaround is some ways off. Expectations about Trump’s potential actions are already baked into the share price. And there is no way of knowing whether the market will be as ebullient once profits improve.
Mr Market’s periodic bouts of optimism rarely synchronise with the cycle of an investment thesis. When he is prepared to pay you for a future which has yet to be delivered, it is time to take your profits and run.
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