On Friday, we talked about the group of stocks I called "bets, not businesses" back at the end of 2013. As a group, they badly underperformed the market in 2014, with only Facebook (FB) powering ahead of its peers to deliver solid returns. These companies, trading at triple-digit multiples of earnings, are not investments. They are bets on favorites at poor odds.
This year, we have a much bigger pool of "popularity contest contestants" that should be avoided by most investors. While nimble traders glued tick by tick to the screen may have success trading these stocks, most investors will likely find that there is no margin for error and a nonexistent margin of safety in these stocks. From these levels, I believe a permanent impairment of capital is a possible and highly probable outcome.
The business model of zulily (ZU) strikes me as similar to that of Chinese online retailer YY (YY). Both companies sell merchandise for moms and kids as well as home appliances and furnishings via online flash sales. I have to think that if zulily was widely accepted at this point, I would be seeing charges on my accounts, as my wife is a big fan pf the flash sales. This is not a terrible company and it's been growing, but I do not see any revolutionary product or service that is worth 393x current earnings and more than 50x "always highly accurate" analyst earnings expectations. In the most recent quarter, zulily was experiencing long delivery times and some margin pressure. If it misses estimates, this stock could tumble very far, very quickly.
I have to put GoPro (GPRO) on my triple-digit multiple danger list as well. I know that wearable technology is the next big thing, but to this curmudgeon it appears to be a camera on a stick, or if you prefer, a camera on a hat. I really don't care about your wide-screen selfie or footage of your last bike ride and have a hard time seeing this as a widely owned item. In fact, at the risk of receiving irate and mean-spirited email, I think it's a fad (I probably just guaranteed this will be the one stock on the list that goes up this year!). I don't see anything that justifies the stock trading at 247x current earnings and 53x "prayed for" 2015 earnings.
CoStar Group (CSGP) has what I think is a pretty good business. The company offers property management services for the commercial real estate industry in the U.S., U.K. and France. It provides sales information, sales tools, research, forecasts and an advertising platform for the industry. This is one of those "I wish I had thought of this" businesses I run across from time to time. However, as much as I like the business, I don't see the type of breakthrough service or technology that justifies a triple-digit earnings multiple and double-digit sales multiple. At 122x current earnings, 51x expected earnings and 10x revenues, the stock is just too darn high.
The Advisory Board (ABCO) calls itself a "global technology, research, and services company providing a leading cloud-based performance platform for the health care and higher education industries." Apparently, the company meets with industry executives to solve problems and develop solutions that elevate performance. According to the company's last press release, they provide strategic guidance and actionable insights. While I notice the admirable collection of hot buzzwords, I just do not see anything in the company's business that would inspire me to pay 118x current and 35x expected earnings. Even if you buy the story, the price/earnings-to-growth (PEG) ratio is over 7x, so it's difficult to make a case for the company's current valuation.
The final stock on my list is Lifeway Foods (LWAY). While my idea of natural food is steak and potatoes, I am aware there is a market for healthier foods. Still, I am not sure how big the market for probiotic, cultured, and functional food products is in the U.S. In addition, I'm highly confident that there is not enough of a market for what CEO Julie Smolyansky calls "nutritious probiotic kefir products" to justify the stock trading at 125x current earnings and 35x forward estimates. Lifeway looks like a well-run niche food company, but the business does not appear to justify the current price.
Buying stocks with triple-digit earnings multiples is impossible to justify as investing. This type of speculation is best done standing at the outside rail on a sunny day with a cold beer in hand.