Time to Sell Platinum

Selling stocks that seem to be rising is the second hardest thing in investing – right after buying stocks that seem to be falling – but you have to do it if you want to be successful. The truth is that stocks don't possess momentum, so it's an illusion that they're rising or falling – driven by the human instinct to see patterns in things. In reality there's nothing to suppose that a stock that has risen will rise some more, or that a stock that has fallen will fall more; you just have to decide what's the best thing to do at any given price.

At over $9 we think it's best to sell Platinum Asset Management. All things being equal, a fall in the Aussie dollar should add to the company's funds under management, earnings and value, each as measured by Aussie dollars. The US dollar is Platinum's main currency exposure, at 70%, according to Kerr Neilson's latest quarterly update, but it is exposed to other currencies against which the A$ has fallen less. The A$ has fallen 13% against the US$ since we raised our Sell price for Platinum a year ago, but the move is probably closer to 10% against the basket of currencies.

It's also only a one-off benefit. That benefit should be reflected in enhanced growth rates this year and next, but you can't capitalise that growth by adding to the multiple you're prepared to pay for earnings. The 24% rise in the share price since the start of 2015 suggests the market may be doing this.

You could mount an argument that, with the Aussie dollar lower, people will begin to realise the benefits of overseas investing, but they'd be shutting the door after the horse has bolted – or at least moseyed out across the paddock – and we wouldn't rely too heavily on this. The benefits of overseas investing are many (which partly explains the recent launch of our Premium Service, which offers advice on overseas stocks) and they don't all depend on the level of the Aussie dollar at a given time.

Different futures

Of course it's easy to imagine a rosy future for Platinum: Neilson gets his performance mojo back, before completing a smooth transition to others within the company; those others maintain their outperformance; people increasingly see the benefits of some overseas exposure; funds flow in; earnings grow; the share price follows. Magellan Financial Group has shown how quickly these businesses can grow (as did Platinum itself a few years ago).

But it's also easy to see the risks. Neilson (now in his mid-sixties) leaves; Platinum falls apart. Now we should stress that this isn't how we expect things to unfold – but it's undoubtedly a major risk and for that reason it's dangerous to capitalise Platinum's earnings too much, let alone those resulting from the lower Aussie dollar.

The chances of a smooth transition have also dipped a little after the resignation of one of Neilson's key lieutenants, Jacob Mitchell, in December. He will be replaced as manager of the Japan Fund by Scott Gilchrist, a 10-year Platinum veteran (albeit with a 3-year hiatus between 2007 and 2010) that previously worked in the resources and industrial sectors.

We expect Platinum to make about 36 cents in earnings per share for the current year (although we'll get more clarity on this following the interim result later this month). That would give a price-earnings ratio of about 25 at the current price. With all of this coming through as cash and now being paid as dividends, that gives the stock a fully-franked dividend yield of about 4%. But it's not quite enough for us given the risks and – with the stock up more than 150% since our last buy recommendation on 10 Jan 12 (Long Term Buy – $3.57), although only slightly higher than our first on 4 Jun 07 (Long Term Buy – $7.90) – we think it's time to take the profit. We're therefore selling the 1,800 shares in our Growth Portfolio and the 1,200 shares in our Income Portfolio.

We're raising our Buy price to $6 (from $5.50) and our Sell price to $9 (from $8), but that still means a downgrade to SELL.

Note: We're selling the 1,800 Platinum Asset Management shares in our Growth Portfolio and the 1,200 shares in our Income Portfolio at $9.06, giving total proceeds of $16,308 and $10,872 respectively.