Investment View: It may be time to leave the cinema and give up pizza

Even with the best of stocks there sometimes comes a time when it is right to pull out
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The Independent Online

In this column I've often said hold for the long term, even when a stock looks pricey. There is a good reason for this. Dipping in and out of stocks is a risky business. You can easily make the wrong call. I'm not immune. Nor are some of the City's highest-paid fund managers.

Hence the long-term hold call. When I apply it, it is usually to a company whose business I rate as likely to produce a decent return for those willing to buy in and stash it away.

As such it will usually tick a number of boxes, such as operating in a good market, having a solid management, a record of strong performance, a tendency to avoid silly mistakes, a reasonable dividend and acceptable governance structures (though shareholders are generally charged far too much for the services of those who run public companies).

But even with the best of stocks, there sometimes comes a time when it is right to pull out. A good rule for investors is always to leave something in for the next owner. A former colleague once forgot this when their Railtrack shares were at £14, a few months before the company went pop.

So to a few examples where I've made the long-term hold call in the past, but where you might now consider pulling out.

First Cineworld, whose charms as an investment are obvious to anyone who has been a customer. The price cinemas charge for a box of popcorn and a paper cup of Diet Pepsi are simply outrageous. That is after you've shelled out for the ticket.

I've just booked to spend tomorrow with my son and his uncle at a rival chain where we'll be watching Monsters University, Pixar's latest blockbuster. Just for fun, I checked out the price at the nearest Cineworld. It would be even more expensive. But despite the profusion of alternatives for people's increasingly stretched leisure pound, they are still piling in to Cineworld's outlets, and buying truckloads of its popcorn.

In its most recent trading update, the group reported some bravura numbers. Revenue was up 22 per cent for the 26 weeks to 27 June, against 14.3 per cent after nine weeks, which, as the broker Panmure noted, suggested a stunning 42 per cent in the past seven weeks. The sun was surely shining on it during June, when, significantly, it grabbed market share from rivals.

There are clouds on the horizon, however. Competition watchdogs may take some of the gloss off its purchase of Picturehouse, and the company's fourth quarter last year was flattered by the James Bond movie Skyfall. So it may struggle to produce the sort of growth that investors have been enjoying this time around.

Attractive though Cineworld is, the shares have been on a stunning tear, and at 15 times 2013 forecast earnings are not cheap. Cinemas have a lot going for them, as long as Hollywood keeps supplying product people want to see. But now may be time to book some profits.

The same is true for Domino's, the pizza company whose outlets are spreading faster than melted mozzarella over a doughy base. Those pizzas are highly profitable – except, it seems, where the Teutonic tastebud is concerned. Germany has proved strangely resistant to the firm's charms, resulting in a surprise profit warning. The shares took a knock as a result. Before the unscheduled trading update, they were approaching 30 times forecast 2013 earnings. Now it is more like 27 times with a 2.5 per cent forecast yield.

The UK, Irish and Swiss businesses were all good, and Domino's is still a quality operation. But the German troubles show that expansion at the rate Domino's has been enjoying carries risks. Nothing ventured, nothing gained and all that, but the price still feels a little too frothy for my blood.

While you've missed the best profit-taking opportunity, it may still be worth considering cashing in. This is still a tasty business, all things considered, but the price is just a little too fat. Which is what eating too many of those scrumptious pizzas will make you.

Finally to Sage, whose shares are bouncing around a five-year high. The software group recently conducted a teach-in for analysts. I rather like this little missive from Panmure ahead of the event: "Sage is clearly 'speaking' to investors about 'visibility', 'robustness', global reach, ownership of a particular segment." In other words, it is not immune from talking a load of tripe and using City buzzwords.

Of course, as Panmure pointed out in the same note, Sage remains "the Masters of cash creation". It adds: "The many product initiatives have yet to move the forecast needle – and we need evidence that the 'good stuff' from engineering is being sold, so we remind investors about our valuation concerns."

I can understand those concerns, at 16 times forecast earnings for the year to 30 September, yielding 3 per cent. Still, I'm more or less convinced this is one to stick with, even though it looks toppish. The Masters of cash creation? Well, I wouldn't go that far, but Sage feels like a decent home for your money, so I make it a long-term hold.