There are a lot of aspects to investing that can be difficult for investors to master. For example, having the patience to hold game-changing business through wild vacillations, and allowing your investment thesis to play out over time, can be a daunting task.
But arguably the toughest thing about investing is deciding when to sell and either book profits or take your lumps. While there are no shortage of viable reasons to sell -- e.g., tax purposes, management changes, or a personal emergency that requires capital -- the most-logical reason to part ways with a stock is when your original investment thesis no longer holds water.
The following three ultra-popular stocks have all delivered huge gains to their shareholders. However, the time has come for investors to book their profits and look for greener pastures.
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Moderna
Some of you might call this idea a bit crazy, but I believe it's time for investors to lock in some or all of their gains on coronavirus disease 2019 (COVID-19) superstar Moderna (MRNA -0.58%). Shares of the company are up 174% on a year-to-date basis, and they've soared close to 1,400% since COVID-19 became a point of focus in China in late 2019.
The obvious reason Moderna has been such a success is the company's emergency-use authorized COVID-19 vaccine, mRNA-1273. In the phase 3 COVE trial, which presented data in late November 2020, mRNA-1273 demonstrated a vaccine efficacy (VE) of 94.1% and was 100% effective against severe forms of the disease. With the exception of the Pfizer/BioNTech COVID-19 vaccine, Moderna offers one of the highest VE's in the entire treatment landscape. This success is expected to translate into $19.2 billion in full-year sales in 2021. This would make mRNA-1273 the world's third best-selling drug, behind only the Pfizer/BioNTech vaccine (BNT162b2) and AbbVie's Humira.
So, why sell if the company's vaccine has been such a success? The first thing to consider is that the COVID-19 treatment landscape is going to get more crowded. Both Johnson & Johnson and AstraZeneca are angling to ramp up production of their respective vaccines, and Novavax looks to have a really good shot at gaining emergency-use authorization for its experimental vaccine, NVX-CoV2373 within the coming months. Not surprisingly, Wall Street is expecting Moderna's sales to retrace 16% in 2022 to $15.4 billion.
Second, there are clear valuation concerns. Even though Modena isn't exactly expensive on a price-to-earnings basis (relative to Wall Street's earnings per share consensus in 2021), it is going for close to six times peak sales for mRNA-1273. A peak sales multiple of six is often the top for most biotech stocks.
And thirdly, mRNA-1273 is the company's only revenue-generating product. The mutability of the virus, along with increased competition, makes Moderna a risky bet at a market cap of $115 billion.
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GameStop
Another exceptionally popular stock that it's time to take some profits on is video game and accessories retailer GameStop (GME 1.07%). Shares of the company are higher by 794% on a year-to-date basis and up more than 3,900% over the trailing year.
Although I'm clearly no fan of GameStop, I can recognize that it's made folks (i.e., retail investors) a lot of money. Back in mid-January, no publicly traded company had higher short interest, relative to its float (tradable shares), than GameStop. This led to an epic short squeeze that sent the company from around $20 a share to nearly $500 in a matter of days.
But whereas most short squeeze candidates give back their gains pretty quickly, GameStop has been able to hang onto a good portion of its increase. The reason is simple: It's been able to raise a healthy amount of cash. GameStop's balance sheet wasn't a mess prior to the pandemic, and management had the ability to sell stock at inflated levels to raise the capital necessary to pay off all of the company's debt. In April, GameStop raised $551 million in gross proceeds selling 3.5 million shares, and it tacked on $1.13 billion in June after selling 5 million additional shares. With no debt and abundant cash, GameStop isn't a bankruptcy risk and it has more than enough capital to effect a business transformation.
As with Moderna, you're probably wondering "Why sell?" The first reason (cover your eyes, meme traders) is that GameStop remains a work in progress. Although its e-commerce sales soared 191% in fiscal 2020, it also saw net sales plunge 21.5%. GameStop was simply too late in recognizing that gaming had gone digital, and now it's stuck with thousands of brick-and-mortar gaming stores, many of which are underperforming. GameStop will be busy closing stores for years to come in order to reduce expenses and back its way into the profit column, once again.
The other big reason it's time to book profits is the potential for a short squeeze simply isn't appealing. Even though its short interest is still a lot higher than your typical stock -- 8.22 million shares held short, relative to a float of 56.41 million shares -- short shares held fell by 31% since the end of May. In other words, short sellers have been covering and the share price has been falling. The initial catalyst that got retail so excited about this stock just isn't there anymore.
Image source: Getty Images.
AMC Entertainment
Last, but not least, it's a good time to consider locking in gains on movie theater chain AMC Entertainment (AMC 8.22%). AMC is the top-performing stock on a year-to-date basis (minimum market cap of $2 billion), with a gain of about 1,500%.
Similar to GameStop, retail investors have given their time and attention to chasing a potential short squeeze in AMC. While they're were effective in doing so in late January after AMC was able to save itself from bankruptcy by selling stock and issuing high-interest debt, the late May/early June rally had nothing to do with short covering and everything to do with misinformation on social media driving the share price higher.
Why sell? The logical reason is that fundamentals always matter. Prior to the pandemic, AMC was never valued higher than a $3.8 billion market. Back then it was profitable, it had far less debt than it does now, and it controlled its film exclusivity destiny. Nowadays, AMC is losing money hand over fist, it has well over $3 billion in net debt and $473 million in deferred rental obligations, and it's losing screen time and/or revenue to studios with streaming capabilities.
Another reason to pack your bags on AMC is that the short squeeze thesis no longer makes sense. Between the end of May and the end of June, shares held short declined from 102.3 million to 75.5 million. As more than a quarter of outstanding short shares were covered, AMC's share price declined. It took a social media misinformation campaign and the purchase of hundreds of millions of shares by retail investors just to drive AMC to $72 for a brief moment. Imagine what minuscule impact covering some of the remaining 75.5 million shares will have on the price. And remember, short-sellers don't have to cover anytime soon, which kills the idea that a squeeze is imminent.
If you need one more good reason to exit AMC, look no further than the noted misinformation campaign. For the past three weeks I've been highlighting the mountain of unsubstantiated hype and lies AMC's retail investors have been spreading to keep this pump-and-dump scheme from collapsing. With AMC's share price now more than halved from its all-time high, it's clear that people are finally seeing this scheme for what it is.
If you made money on AMC, congratulations. It's time to book those gains and look elsewhere before you lose it all.
