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3 Expensive Stocks You Shouldn't Sell

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are three types of value investors:

  1. Cigar-butt investors
  2. Fair value investors
  3. Business owners

Cigar-butt investors look for liquid-able assets selling on the cheap. This is often referred to as net-net investing, popularized by Benjamin Graham.

Fair value investors are those who buy stocks when they are trading at a discount to fair value and they sell them when they become overvalued.

Finally, business owners are the investors that treat stocks like businesses. They don't kick them around as if stocks are nothing more than tickers. Instead, they attempt to buy wonderful companies at a reasonable price, holding on to the business as long as prospects remain sweet.

It's important to identify which type of investor you are. There's no need to identify your investing type by some sort of name, but every investor should have some self awareness regarding their strategy. This way, when a stock in your portfolio appears to be overvalued, you'll know what to do.

For those of us in the third group, here are three stocks that you shouldn't sell, even if they appear to be overvalued.

Amazon (NASDAQ: AMZN)

On Aug. 23, 2012 I wrote an article claiming that Amazon was still worth its seemingly monstrous valuation. The stock is up 9% since then, but I still hold to my statement. Though this is no endorsement to buy the stock, I definitely do not believe it should be sold. Amazon is an excellent company with enormous growth prospects going forward.

In general, only 5% of overall spending is represented by online sales for retail spending. In other words, there is plenty of room for online spending to continue to increase. And Amazon, as the world leader in e-commerce, is positioned right where it needs to be to benefit from this trend.

Intuitive Surgical (NASDAQ: ISRG)

In a recent article on Intuitive Surgical, I used simple math to conclude that if Intuitive Surgical's revenue growth trajectory slowed to 15% (down from 20%) over the next 10 years that it would take approximately 9 years for the stock to double. This would likely amount to an annualized return of somewhere around 8% – not so impressive.

But this does not mean that investors should sell Intuitive Surgical. In fact, the company has yet to show any signs of a slowdown. I've been following the company closely for three years now and each year it surpasses my expectations. In fact, its revenue growth curve doesn't appear to be linear – it seems to be somewhat exponential:

<img alt="" src="http://media.ycharts.com/charts/330491d3f72e86d4e26d71043fa14c98.png" />

ISRG Revenue TTM data by YCharts

Fundamentally, Intuitive Surgical is firing on all cylinders. I wouldn't even consider selling.

Nike (NYSE: NKE)

Things are looking good at Nike.

On a currency neutral basis, revenue was up 10% in Nike's most recent quarter from the year ago quarter. The company's net profit margin of 8.2% is significantly higher (by about 200 to 300 basis points) than both Under Armour and Adidas. Ultimately the company's gross margins in footwear are higher than all of its competitors – clear evidence of Nike's pricing power.

At 22.5 times earnings, the company is expensive. In a recent discounted cash flow valuation I did on Nike in which I used what I thought were somewhat aggressive projections, my fair value estimate came in 10% lower than today's price.

But who cares? The business is solid, growth prospects in emerging markets look good, and entrants don't seem to be gaining any significant foothold in Nike's territory.

I probably wouldn't buy Nike at today's levels, but I sure as heck wouldn't sell.

The Bottom Line

Straight out of the Berkshire Hathaway Owner's Manual, take it from Buffett: "Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family."

It could be argued that Amazon, Intuitive Surgical and Nike are each overvalued, but that doesn't mean you should sell – at least not for the business owner.

But I'm confident enough in Amazon, going forward, that I'm initiating an outperform CAPS call on the stock today.


DanielSparks has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Intuitive Surgical, and Nike. The Motley Fool owns shares of Amazon.com, Intuitive Surgical, and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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