It's true that it often makes sense to hold on to shares of great companies, particularly when they're executing well. Sure, investors who take this approach may have to endure quite a bit of volatility, as a stock's valuation can get ahead of itself from time to time. But it's a simple way to only have to buy a good business once and profit from it over its lifetime. With this being said, a good rule of thumb is to consider selling a stock -- or at least significantly trimming the position -- when it becomes grossly overvalued. With graphics chip-maker 's (NASDAQ: NVDA) stock more than doubling year to date, has the stock gotten to the point that it is grossly overvalued?

To gauge whether or not NVIDIA shareholders should take some profits off the table today, let's take a look at two things: the overall market and NVIDIA stock specifically.

First, investors should note that there are signs of exuberance in the pockets of the overall market, namely in tech. Signs of underlying froth in tech could pose a risk to Nvidia's stock price performance over the long haul. Note that even though the S 500 has risen 12% year to date, the Nasdaq Composite has soared a whopping 27%. Even more, the average price-to-earnings ratio of stocks in the Nasdaq 100 Index is now greater than 29 -- up from 26.5 this time last year and way above the average multiple of 18.7 for stocks in the S 500. In short, investors should tread cautiously right now when it comes to tech stocks. Not only have many of them seen extraordinary returns this year but some of their valuations have been pushed to levels that require very bullish long-term forecasts for their earnings growth over the next five years. There's little room for error.

Continue reading

Source Fool.com