• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Consumer Staples

Beware of the New-High List

Many stocks on the list appear vulnerable, so I use it to find candidates to sell or short.
By TIM MELVIN Nov 02, 2011 | 09:30 AM EDT
Stocks quotes in this article: SBUX, AVB

As I watched the market move lower Tuesday on yet another round of confusion out of Europe, I felt a lot more confident about my "react do not predict" approach to the markets.

Less than a week ago, everyone was super bullish and predicting a bright future now that Europe had solved some of its sovereign debt issues. Who could have possibly guessed that the Greeks would decide to vote on allowing the rest of the continent to bail them out? If nothing else, we have learned that expecting rational behavior out of Europe is too much to ask. There appear to be too many self-interested parties at the bargaining table to reach a mutual and workable conclusion.

I also felt a lot more comfortable with my strategy of looking at the new-low list of stock ideas as opposed to the new-high list. While I get the whole "a stock has to make a new high in order to double in price" approach popularized by William O'Neil in the 1990s, I also get that many of the stocks on the new-high list are vulnerable. As Warren Buffett once observed, "You pay a very high price in the stock market for a cheery consensus." If a popular company makes a mistake or misses earnings, the fall can be sudden and brutal. Since the stock does not trade at a discount to assets or earnings value, there is often a real and permanent loss of capital. My value stocks may go down, but they tend to have assets such as property, building, equipment and even deferred tax benefits far in excess of the market quote, so a permanent loss seems less likely to me.

Looking at the current list of stocks flirting with new highs, I see two that are potentially dangerous. Starbucks (SBUX) hit a new 52-week high last week and has already slipped more than 5%. I am not necessarily a fan of the high-priced coffee shop, but my wife and daughter love the place. In the interest of total disclosure, I wrote this column at a Starbucks because I'm still waiting for the Internet to be connected at our new home. But just because Starbucks has saved me a few times during Internet outages does not mean I am willing to pay 27x earnings for its stock. I admit that Howard Schultz is a marketing genius and a great CEO; however, that does not entice me to pay for a stock that has quadrupled in the past three years and is up 44% in the past year. One corporate mistake or a continued decline in consumer confidence that makes a $5 cup of coffee less attractive and new-high buyers could be looking for something to spike their lattes. I am not ready to short Starbucks, but I f I owned it I would be looking to sell or hedge some of my shares.

AvalonBay Communities (AVB) is another great example of the dangers of the new-high list. I made the bear case for this stock a little more than year ago and bought some put spreads on the apartment real estate investment trust. The trade was a loser as the shares continued higher after the briefest of dips. Last week, they missed earnings by a penny and the stock dropped 10 points in a day. Currently, AvalonBay shares are a little more than 6% below 52-week highs, and I am ready to try this one again. The multiples of cash flow, earnings and asset values are ridiculously high. Investors playing the housing theme have pushed them way beyond any rationale estimate of valuation. I am shopping for put spreads to bet on the downside in this stock over the next six to 12 months.

Rather than looking for names on the new-high list, I use it as a source for candidates to sell or short. I prefer to bet against a cheery consensus staying in place amid today's cynical financial markets.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Staples

More from Consumer Staples

Jim Cramer: How Will Stocks That Thrived Amid Covid Do Post-Pandemic? Who Knows

Jim Cramer
Feb 5, 2021 6:54 AM EST

The forces that benefited shares of companies such as Peloton Interactive and Clorox may not sustain them once the impact of the virus subsides.

Altria Stock Is Ready to Light Up

Bruce Kamich
Jan 27, 2021 9:31 AM EST

Earnings for the tobacco company are set for Thursday.

My Top Stock Pick for 2021

Ed Ponsi
Dec 31, 2020 8:30 AM EST

Even after a solid 2020, this company has laid the groundwork for a successful 2021.

With Dividend Investing En Vogue, Here Are 4 More Stocks to Consider

Chris Versace
Dec 22, 2020 10:00 AM EST

The consistent annual dividend increases by this quartet even during bad times make them good income-investing bets going forward.

2 Food Stocks Worth Digging Into for Dividend-Hungry Investors

Chris Versace
Dec 3, 2020 11:00 AM EST

Long histories of annual dividend increases make Hormel Foods and McCormick & Co. attractive income plays.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 08:50 AM EST PAUL PRICE

    Michaels: Close to a Deal?

    It appears that a deal could be announced soon. ...
  • 08:34 AM EST GARY BERMAN

    Wednesday Morning Fibocall for 3/3/2021

    SPX (Long-Term View) The 20 DMA @ 3889 with the ...
  • 06:05 PM EST PAUL PRICE

    Michael's (MIK) Up on Takeover Rumors

    The NYT says talks are underway regarding a buyout...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login