However, knowing when to sell is a different ball game entirely. For instance, if a share has performed strongly and hits a pre-determined target price, then you can do one of three things: sell your holding; reassess the investment potential and set a new fair value estimate; or alternatively top slice part of your holding and bank some gains.
The problem with getting off the stock market escalator - even when a share has reached your fair value estimate - is that you run the risk of exiting too early and forfeit the chance of making even greater profits. And even if you were too conservative with your original target price, and opt for setting a higher one, you always run the risk that this is the wrong call and end up donating some of your profits back to Mr Market. That's why top slicing can have merit as you can continue to ride the upside potential and redeploy your capital – and realised profits - elsewhere which also diversifies risk. For instance, it's a strategy I recommended last month on our investment in KBC Advanced Technologies to crystallise some of the 73 per cent paper gain.
This issue has more than a passing interest to me right now because several of the shares I have tipped in recent months have already hit my target prices and need updating.
Hot property
For instance, I realise many readers will have bought shares in Workspace after I outlined the investment case in an online exclusive to IC Advantage subscribers last autumn (Hot Property, 14 October 2010).
The property company mainly provides workshops and studios to small and medium sized businesses on industrial estates, former factories and office blocks close to major transport hubs in London. It's a good niche to be focused on because if the UK economic recovery is really on track then it was always going to show up early on in strengthening demand from businesses in the capital. My initial interest was also prompted by news that chairman Tony Hales had splashed out over £100,000 buying shares at 21.25p, a significant discount to the company's last reported net asset value of 27p and to analyst estimates of 29p for the March 2011 year end. And those forecasts look solid if last week's third quarter results are anything to go by with all the key indicators I monitor showing positive growth: occupancy rates, cash rent roll, property values and monthly lettings. In fact, occupancy rates at Workspace's centres are at their highest level since March 2008 and importantly not at the expense of rental rates.
Management has strategy in place to unlock value in the company’s properties, and funding is not an issue, so it is hardly surprising the shares have performed well, rising from 22.5p and above my 25.5p target price. However, with Workspace a strong beneficiary of the upswing in the business cycle given its London office exposure, I have decided to raise my target price to 29p – in line with the break-up value of the company – and continue to rate the shares a medium-term buy at the current 25p.
Netcall hits the right tone
IC Advantage subscribers, who can access my weekly articles online every Monday, also made the right call on Netcall, a small cap company offering software to makes telephone call handling more efficient and one that boasts over 600 clients in the private and public sectors. Over 4.1m shares have been traded since the article was first published online (Queuebusters, 17 January 2011). However, the price has responded accordingly, and many found they could only buy at around 16p to 16.5p, rather than the 13p quoted in my article. The shares hit my 20p target price fairly quickly.
In hindsight I was being too conservative with my fair value estimate, since adjusting for Netcall’s expected cash pile of £5.2m at June's year-end and valuing forecast pre-tax profits of £2.3m on a more realistic PE ratio of 14, a target price of 23p is more realistic. So with market makers currently offering to sell the shares at 17.5p, there is potentially a further 30 per cent upside.
Walker Greenbank's chic performance
Luxury interior furnishings group Walker Greenbank has issued yet another upbeat trading statement, prompting analysts to upgrade profits estimates yet again. Pre-tax profits are now expected to be no less than £4.9m for the year to end January 2011, more than double the outcome the prior year, which would produce EPS of around 6.3p. Moreover, with sales momentum strong, profit forecasts of £5.2m for the current financial year look way too low and the risk is firmly on the upside.
The company will also raise the final dividend by at least 30 per cent to 0.65p when it reports final results on 12 April 2011. It could be more as analysts at Edison Research point out that, boosted by strong cash generation, net debt could now be as low as £2.2m, or only 10 per cent of net assets.
It's hardly a surprise that the shares have surged since I advised buying at 30p (Happy anniversary, 6 September 2010) and at 55p my target price of 65p looks in danger of being hit sooner rather than later. Therefore, I am raising my 12-month target to 75p which still only equates to 11 times conservative looking earnings estimates.
