With the FTSE 100 reaching record highs, it seems investors have begun taking profits from even the most popular of UK stocks. And with concerns of a potential looming correction, this activity has seemingly started to accelerate.
Which shares are seemingly on the chopping block right now? Well, according to AJ Bell, the five top shares being sold are:
- Rolls-Royce (LSE:RR.)
- Lloyds Banking Group
- International Consolidated Airlines
- Glencore
- GSK
So is this an early warning sign for other investors to do the same? Or is now the time to be a contrarian and buy while most are selling?
Aerospace, energy and defence
At the top of the list lies one of the most popular stocks in Britain – Rolls-Royce. The once-struggling engineering firm has delivered arguably one of the most explosive FTSE recovery stories of the last decade.
However, with such impressive growth under its belt and a valuation that’s getting quite stretched, it seems investors have begun locking in some of their profits. That’s hardly a major surprise since £1,000 invested three years ago is now worth around £17,400.
Rolls-Royce’s balance sheet‘s still a little debt-heavy. But with free cash flow generation surging, its leverage is becoming increasingly more affordable, especially as management makes progress in chipping away at its pile of outstanding loans.
At the same time, long-term demand for modern nuclear energy solutions as well as higher expected European defence spending are also driving long-term tailwinds. As such, most institutional analysts still have the stock on their Recommended buy lists.
So far, it seems like selling could be a mistake…
Risk versus reward
While the business appears to be in a strong position, like many other UK stocks, there’s growing uncertainty about the valuation. The average consensus among experts points towards a share price forecast of 1,245p – roughly 9% ahead of where the stock’s trading today.
That’s a respectable figure, but it’s a massive slowdown compared to the quadruple-digit gains of the last three years. And with the forward price-to-earnings ratio currently sitting near 40, it seems most of the expected growth from nuclear and defence is already priced in.
In other words, expectations are high. And that means the slightest bit of operational disruption could trigger a substantial price correction. So far, the leadership’s proven it can execute effectively. But external forces such as supply chain disruptions or bottlenecks triggered by mounting geopolitical and trade disputes can emerge suddenly and are difficult to predict.
Time to sell?
Looking at Rolls-Royce, the company still has ample long-term potential, in my opinion. But with such lofty expectations from investors, the volatility risk’s definitely rising.
So while I’m not a shareholder, it may be worth considering trimming some shares if the stock has grown to be a large part of a portfolio. And the same might be true for the other stocks on this list if the risk’s starting to be too high versus the potential reward – something investors need to investigate.
But even during volatile markets, there are always opportunities. And by having some cash on the sidelines, it gives investors the flexibility to capitalise on them. And right now, I’ve spotted quite a few FTSE opportunities hiding in plain sight.
