myICLUB Blog

In the December 2025 issue of the SmallCap Informer, we introduced a new feature for subscribers, “Valuation Watch.”

Occasionally, companies under coverage will approach the price at which we suggest a sale should be considered. However, we leave the specifics of portfolio management, including the timing of buys and sells, to subscribers, and we may carry these over- or hyper-valued stocks on our coverage list as long as fundamentals warrant.

Commonly, these stocks have good prospects for continued growth. Our concern mostly addresses the possibly excessive valuations these shares have reached. Stocks on our Valuation Watch carry diminished potentials for future returns as investors have already pushed up their prices significantly and into valuation extremes that discount future fundamental gains. However, the "risk" (if you can call it that) of selling these high flyers is that they often continue to soar after being removed from a portfolio. The market is pricing these shares with an expectation of more good news, and as long as that news continues to arrive with a positive flourish, these stocks may continue to float at lofty levels.

On the other hand, the risk of not selling or replacing these companies is that they have been priced for profits that are expected but not yet earned, so any perceived threats to that earning potential will send the stock into a tailspin. If actual results underrun expectations, or if management provides guidance that suggests that the good times are over, the downsides of these stocks will likely be severely tested.

Some subscribers may wish to employ some method of downside protection to such stocks with high valuations. A trailing stop-loss order (TSLO) can be an effective tool to sell a position when a stock's valuation turns south. Each subscriber must perform the calculus to determine if incurring capital gains and paying the accompanying taxes from such a sale is better than accepting a price decline of 10% or more from the shares, and also to anticipate if feelings of regret would be manageable if the stock were to fall in price, trigger a TSLO and be sold, and then recover and go on to greater heights.

Another strategy in coping with over- and hyper-valued stocks is to consider sales of underperformers tied to sales of outperformers with an objective of offsetting capital losses wih gains. In a taxable portfolio, such as strategy can be most effective in minimizing the downside risk of overpriced stocks at the same as reducing the perhaps limited upside potential from the decliners.

Overvaluation Measures

Here are some of the tools that we use to identify stocks that land on our Valuation Watch.

If a stock’s future potential total return is so low that it comes close to the return that you could achieve from a relatively risk-free investment, such as from holding long-term U.S. government bonds. With the 20-year bond yielding around 4.7%, it may not be that the projected total return of the types of growth companies that we favor will be below that rate. Still, a stock with a projected total return in the mid-single digits might reasonably be considered a sell candidate.

Another measure that may suggest a hypervalued situation include if relative value is greater than 150%. This indicates that the company’s current P/E ratio is 150% of its average P/E ratio and at the extreme high end of its valuation range. The P/E ratio will likely only decline from this level, amplifying any price declines that may come.

On the Stock Selection Guide, if the Upside/Downside Ratio is less than 1-to-1, this indicates that the potential reward is roughly equal to the potential risk at the current price. Since we like to stack the odds in our favor, if the upside is limited when compared to the downside, it might be the right time to sell.

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It’s important to note that selling is a highly-individualized process. The specific tax circumstances of an investor's holdings, such as whether or not they are held in a taxable or non-taxable account, or whether gains would be taxed at short-term or long-term rates, may impact the decision to sell or replace.

Other considerations that can affect portfolio sells (and purchases) include making adjustments to help the diversification and weighting of the portfolio, or to harvest capital gains and losses at tax time. Often, though, these decisions are best aided by the evaluation of the fundamentals and valuation metrics.

It is our hope that the Valuation Watch feature will help subscribers better monitor small-cap stock holdings that have reached over-optimistic price levels and thus keep their portfolios poised for the best possible success.

• DOUG GERLACH

Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 45 high-quality small company stocks currently covered in the newsletter.