As 2014 came to an end I wrote a series of articles about egregiously overvalued stocks to avoid entering the new year. Now, with the end of the first quarter sneaking up on us, I thought it would be interesting to take a look back and see how we are doing. Over the years I have been pretty pleased with the lack of performance in names I identify as overvalued. I have taken a few smacks in the teeth, of course, as anyone who has ever bet against momentum will experience, but on balance investors have done well avoiding those ridiculously priced stocks.
Here are the 2014 egregiously priced stocks and their performance so far in 2015:
Yelp (YELP) (-14%)
Live Nation (LYV) (-2%)
Medidata Solutions (MDSO) (+5%)
eHealth (EHTH) (-58%)
zulily (ZU) (-43%)
GoPro (GPRO) (-33%)
CoStar Group (CSGP) (+9%)
The Advisory Board (ABCO) (+7%)
Lifeway Foods (LWAY) (+12%)
If you had purchased an even-weighted portfolio of the nine stocks you would be down about 14% so far in 2015. If this cheap stock stuff doesn't work out for me perhaps I have a future as a short seller! Now let's examine what trees are still trying to grow to the sky and should probably be avoided for the rest of the year.
Netflix (NFLX) is back on the list as the quarter comes to a close. Over the last few years, Netflix and I are like Ali and Frazier. I have suggested avoiding or shorting the stock a few times and seen the price take a huge tumble. A couple of times it has roared higher, though, leaving me bloody in the center of the ring. We use Netflix at our house and I am looking forward to watching House of Cards when we get back from the Keys, and my wife has the Orange is the New Black release dates on the family calendar. However, I will note that we use Amazon (AMZN) Prime Video far more than we do Netflix. Even if that was not the case, Netflix has plenty of competition today and I see nothing about the company that justifies the stock trading at 98x current earnings and 77x "the always highly accurate" analyst estimates for the next year. The risk reward here strikes me as dangerously skewed towards the risk side of the ledger.
Yelp (YELP) is back on my list. I have to shield the screen as I write this because my wife loves Yelp. She yelps everything, especially when we travel. I will be the first to admit that she has uncovered some gems using the service, but I am still more a trial and error guy. I have also noticed that Yelp is a big hit with the Tofu and world peace crowd because we have ended up in some joints that would have made even Jerry Garcia uncomfortable as a result of favorable Yelp reviews. Even if my wife manages to convince millions more folks to yelp their way across America the company is not worth 156x current earnings and 87x "the never overly optimistic" estimates for next year. In my opinion, you have to cure cancer, the common cold and win the World Series in four straight to even come close to justifying that type of valuation.
My final "are you kidding me?" stock for today is The Habit Restaurants (HABT). The company has 100 restaurants in 10 markets throughout California, Arizona, Utah and New Jersey and by all accounts serves up a really good burger. I love a good burger, but having spent some time around the restaurant business and having friends and relatives who own dining establishments I cannot paint a scenario under which any burger joint is worth 156x current earnings and 126x "the almost always guaranteed to be accurate" estimates for next year. I have seen red hot casual dining stocks trade at these multiples so many times in the past 30 years and only a very few of them have survived, much less justified the nosebleed valuation levels.
I noticed several other high flyers with scary valuations that I have not run across before. I will investigate them further and report tomorrow on which ones I think you need to avoid. After a six-year bull market, I think it is more important than ever to avoid stocks where a permanent loss of capital is possible, if not probable.
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