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Should You Sell Petrofac Limited, Shire PLC And Standard Chartered PLC?

It’s not always easy to know when to sell a stock: cheap stocks can get cheaper, while pricey shares can keep rising.

In this article, I’ll discuss whether now might be the time to sell Standard Chartered (LSE: STAN), Petrofac (LSE: PFC) and Shire (LSE: SHP) (NASDAQ: SHPG.US).

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Shire

When AbbVie proposed an offer of £53.20 per share for Shire last year, I thought it was time to sell.

Clearly, I was wrong: barely six months later, the shares have recovered from the post-AbbVie drop and are setting new record highs, at more than £55.

Trading on a forecast P/E of 20, Shire’s valuation clearly does depend on earnings growth from new products or acquisitions. Yet the company’s track record suggests this is realistic: sales have grown by 11.6% per year since 2010, while an operating margin of 28% has helped to build net cash of $2.9bn.

I’d probably hold on for a little longer.

Standard Chartered

Shares in Standard Chartered have put on a surge following the appointment of new chief executive Bill Winters, and have climbed nearly 15% over the last three months.

However, analysts are forecasting an 11% dividend cut for the current year, and no-one yet knows what problems Mr Winters might find when he starts work in May.

Although Standard Chartered looks cheap, with a 2015 forecast P/E of 10.7, the bank’s return on equity — a key measure of profitability — fell from 11.2%, to 7.8%, last year. Halting and reversing this decline could take time.

Petrofac

Petrofac shares fell by 13% when markets opened this morning, after the firm admitted that losses on its problematic Laggan-Tormore project in Shetland will be even worse than expected.

The firm booked a $230m loss on this project in 2014, and now says that “a greater level of rectification and reinstatement work than expected”, combined with further delays, mean that Petrofac will have to recognise another $195m loss on this project.

The problem is that Petrofac took direct responsibility for the construction phase of this project, something it usually subcontracts. The result has been disastrous.

Even before today’s news, I was considering whether I should sell my Petrofac shares: I reckon a dividend cut is increasingly likely, and am not convinced the company’s finances are as strong as they should be.

Petrofac has not generated any free cash flow for the last three years, and today’s news is unlikely to help the firm to solve this problem: the losses being incurred on Laggan-Tormore are real cash, not just accounting write-downs.

Petrofac has moved from a net cash position of $228m to net debt of $1.3bn in just two years. Although the firm’s record $18.9bn order backlog is encouraging, I’m concerned by the apparent lack of cash generation.

I will probably wait a little while to see if the shares bounce back from today’s fall, which was much bigger than I expected, but Petrofac remains on my sell list.

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Roland Head owns shares in Petrofac and Standard Chartered. The Motley Fool UK owns shares of Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.