Caution: This Dividend Growth Stock Has Become Significantly Overvalued

Over my lifetime I have invested in many different things. In the process of doing that, I have learned that there are really only two types of investors.

As an investor, you are either active or passive. Being active implies directly managing or being in control of your investment. In contrast, as a passive investor you allow others to manage the asset on your behalf.

There are advantages and disadvantages to both approaches, and neither approach is necessarily better than the other. It all comes down to each individual’s personal preference.

When I was younger, one of my active investments was running a quarter horse ranch. Unlike humans, a horse’s teeth continue to grow as they age.

Consequently, you can judge the age of a horse by looking into its mouth and checking the length of his teeth. The longer the horse’s teeth, the older the horse.

This method of checking the horse’s teeth to determine its age is also the source of another old adage “never look a gift horse in the mouth.”

As a long-term investor in Visa (V), I would describe my experience more recently as a gift. Therefore, I do believe it’s time to question the value of this gift. More precisely, I believe it’s time to question the valuation of Visa.

FAST Graphs Analyze Out Loud Valuation Analysis of Visa

I have been long Visa since May of 2011 and it has been one of the best performing stocks I have ever owned. However, the following analyze out loud video clearly illustrates the undeniable reality that Visa’s stock price has become significantly overvalued.

I believe the risk associated with such a high valuation is crystal clear when viewed visually via FAST Graphs. Visa continues to be a great company with a clearly defined future. But investors should never forget that price is what you pay and value is what you get.

Although I am currently challenging whether it’s prudent to continue holding on to my position in Visa or not, it’s important to point out that my view of the company remains extremely positive. In other words, I still like the company today as much or even more than I did when I purchased it in May 2011. The company has performed almost precisely as I expected it to. Furthermore, I expect the company to continue growing at above-average rates of 15% to 20% per annum going forward.

Conclusion

I believe that Visa’s current valuation has become extreme. Therefore, I do believe it is time to start looking this gift horse in the mouth. However, the company and its stock price continue to perform. Therefore, I have decided to continue riding this horse a little longer. On the other hand, I am doing so with my eyes wide open. In other words, I am vividly aware that Visa’s fundamentals – as good as they are – do not support its lofty valuation over the longer run.

As indicated in the above video, I believe Visa’s current valuation has gotten long in the tooth. Consequently, I find myself faced with one of my most frustrating dilemmas. I don’t want to sell this wonderful business, but I also don’t want to see my gift of excess profits vanish either. Nevertheless, I am diligently watching my position and I am prepared to sell at the hint of any bad news. The only thing I am truly certain about is that I would not add money to this position at this valuation.

— Chuck Carnevale

Disclosure: Long V at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Source: FAST Graphs

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