Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD.DL), and Tesla Motors (NASDAQ:TSLA). If any of these three companies make up a meaningful size of your portfolio, you likely haven't been feeling the same drag index investors have been feeling over the last three months. While the S&P 500 treads flat, these three stocks all earned investors returns in excess of 35% during this period. So what's the next move for investors interested in these three hot stocks?
In an effort to think of stocks more like businesses and less like tickers, it's a great practice to only consider selling stocks when the underlying business is either not living up to your expectations or when it is diverging from your original thesis. Why sell a stock when it's firing on all cylinders? I've described my reasoning behind this philosophy in more detail here.
On that note, I wouldn't sell Facebook, LinkedIn, or Tesla. Facebook's transition to the mobile environment is exceeding everyone's expectations. LinkedIn's unique visitor growth on both desktop and mobile platforms is actually accelerating, helping the company to continue to beat analysts' estimates. Finally, Tesla Motors is not only delivering mind-blowing results, it has also arguably built one of the best cars the world has ever seen.
Given their astronomical valuations, it’s likely that all three of these stocks are in for a volatile ride. But as long as these businesses are meeting or exceeding expectations, and you have a long-term time horizon, I would give them a chance to keep on running.
For potential investors
I've recently argued that Facebook is fairly valued and that LinkedIn is likely a better buy than Facebook -- but neither is straight-up undervalued. With that said, both Facebook and LinkedIn have powerful network effects working in their favor and excellent business models. In other words, these are great businesses. Personally, I'd apply Warren Buffett's philosophy to these two stocks: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
But keep in mind that both stocks have very high expectations already priced in. So if you're considering buying these stocks, tread carefully and only give a small portion of your portfolio to stocks like these.
Tesla Motors is a different story. Even in Warren Buffett's famous quote, "wonderful companies" must have a "fair" price. As Tesla's stock continues to rise, I believe that it is now clearly in speculative territory. For that reason, I wouldn't buy Tesla stock at today's prices.
Time horizon matters
Stocks like these are dangerous investments when an investor's time horizon is limited. If you want to invest with the Buffett philosophy, then invest with the intention of holding for the long, long term. Anything can happen in the short run -- especially when it comes to growth stocks with lofty valuations like these three.
But if you are in for the long haul, I wouldn't even think of selling any of these three businesses. As Warren Buffett has said,"Our favorite holding period is forever."