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Overvalued Stocks: Don’t Touch These Bloated Investments With a 10-Foot Pole
by Marc Lichtenfeld, Healthcare Expert
Wednesday, November 18, 2009: Issue #1140
To celebrate my parents’ anniversary, I took the family to see Grease last weekend. As musical theater buffs, I figured that they’d love the seeing the show, especially with my kids who had never seen a Broadway quality production.
Unfortunately, they still haven’t. The show stunk. The “actor” who played Danny Zuko couldn’t act. And American Idol winner Taylor Hicks was so bad as Teen Angel, it was laughable. It was one of the worst productions I’ve ever seen – and I should know, as I’ve been in some pretty awful shows (if you saw Last Exit to Brooklyn in San Francisco in 1995, I apologize).
But the purpose of this column is not a theater review, but rather the first of a two-part discussion of value. The tickets were quite expensive and there are few things more aggravating than not getting value for your money.
This often applies to investing, too. Here are the four overvalued stocks to avoid adding to any portfolio…
Avoid a Portfolio Beating From These Four Overvalued Stocks
When the market reverses, overvalued stocks are often the ones that take the biggest beating. So with many calling for the market to do just that, I screened over 5,000 stocks to come up with a few that are as overvalued as those Grease tickets.
Specifically, I looked for companies that are trading at more than 20 times cash flow, with earnings growth of less than 5% and a declining return on assets. Here’s the list…
- Cohen & Steers (NYSE: CNS)
The company is an asset manager, with a specialty in real estate. Since the market bottomed in March, the stock has nearly tripled in value. But that’s where the good news ends. Revenue will decline for the second straight year in 2009. In addition, operating margins are razor thin and the stock is trading at 34 times cash flow.
The market already seems to have priced a healthy real estate rebound into CNS shares. But any suggestion of another downturn in real estate and CNS shareholders may feel worse than Danny Zuko after being stranded at the drive-in.
- Harley Davidson (NYSE: HOG)
In an economy where everyone is worried about the job market, it’s no surprise that big ticket, discretionary items like a new motorcycle are low on the priority list.
Harley Davidson’s results prove this. Revenue is expected to fall by 22% in 2009 and shrink another 1.3% in 2010, according to estimates. The stock currently trades at 27 times earnings, 20 times forward earnings and 137 times cash flow. The company is also loaded with debt. Right now, its bikes represent better value than its shares.
- Rogers Corp. (NYSE: ROG)
Rogers is an industrial materials manufacturer. It makes products like printed circuit board components, polymers and foams. But times are tough and the firm has seen its cost of goods increase to the highest level in 10 years. Those higher costs, combined with declining revenue, led to negative operating margins for the first time in a decade.
Despite these problems, the stock is still trading at crazy levels – 67 times cash flow and 20 times forward earnings. If those lofty valuations are to hold up, Rogers will not only have to see an increase in business, but get its costs under control, too.
- Travelzoo (Nasdaq: TZOO)
Tourism is another sector that has struggled amid a recessionary climate and high unemployment. Many firms have been forced to slash prices in order to drum up business – a tactic that can erode profit margins.
And the struggle is set to continue for Travelzoo. Revenue growth is expected to sink from 17% to 8.6% in 2010. In addition, trading at 11 times its book value, over 50 times next year’s earnings, and 99 times its cash flow, TZOO appears priced for perfection. Any disappointing results will likely result in a crash landing for the stock.
Not only that, it’s operating in a fiercely competitive industry, with other online travel sites such as Expedia (Nasdaq: EXPE), Priceline (Nasdaq: PCLN) and privately owned Travelocity all battling for a piece of the pie.
If any of these overvalued stocks are in your portfolio, or on your watchlist, you may want to think twice about being “hopelessly devoted” to them. When it comes to investing, there are worse things you can do than let a winner become a loser… but not many. So be sure to employ a tight trailing stop on these stocks if you happen to own them – and be very careful about buying them if you don’t.
Next week, I’ll give you several names that still remain good values, despite the market’s recent run.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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One Response to “Overvalued Stocks: Don’t Touch These Bloated Investments With a 10-Foot Pole”
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Marc Lichtenfeld is the Director of Research for Access Research Group; Senior Analyst for the Xcelerated Profits Report and a specialist in biotechnology/healthcare.
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November 18th, 2009 at 2:14 pm
I could not agree more on commercial real estate. Where I live in so. calif. there is a “For Lease” sign on nearly every other building. And personally I would stay away from any stock that is based on discretionary spending and stick with necessities.
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