The past couple of years, I have done columns in late December and early January on egregiously overvalued stocks that should be avoided. I select some stocks that have the fundamental and momentum characteristics that suggest they are getting ready to roll over and create a permanent loss of capital.
Most of the stocks on the list have declined in a spectacular fashion for two straight years. Unlike the energy stocks that declined in 2015, but will recover when the commodity does, odds are these stocks will never reach the premium valuations the market is currently assigning to them. They are falling out of favor and the large institutions are starting to sell the shares. It would seem to be a tradition worth continuing.
Our first wildly overpriced stock to avoid in 2016 is The Habit Restaurants (HABT). The company has a chain of 114 restaurants in California, Arizona, Utah and New Jersey under The Habit Burger. While I am sure it is a fine burger, I have always had a big problem with sandwich shops trading at massive valuations.
Habit shares currently fetch 123x earnings and more than 60x the always optimistic, highly accurate analyst estimates. The stock had its IPO in late 2014 and recently had to cancel a follow-up offering due to weak market conditions and a general lack of interest. Hamburger chains are a very competitive business and I cannot foresee a set of circumstances that justify this valuation.
WageWorks (WAGE) is a much better business, but there are still some high growth expectations built into the stock. The company provides consumer-directed benefits programs such as flexible spending accounts for child care and health care costs. The company also provides transportation fringe benefits consisting of parking, transit passes or van-pooling and bicycle commuting reimbursement.
It is a good business, but it is trading at 83x earnings, more than 30x expectations. The first time WageWorks misses the quarterly estimates, the sellers could come out in force and drive the stock a lot lower.
Yelp (YELP) is on the list for the third year in a row. The social media and review site still trades at what can only be considered ridiculous valuations. My wife and daughter love Yelp and use it constantly. But the site's fans do not seem to be converting into cash quickly enough to move the stock higher.
There is growing competition from Facebook (FB) and Alphabet Google (GOOGL, GOOG). And the partnership with Open Table did not deliver the hoped-for results in 2015. The stock trades at 258x earnings and more than 2000x the diminished expectations for 2016. There is no reason to own this stock at this level. On any rally, it might be worth considering a chicken short, using put spreads.
Healthstream (HSTM) is another company to keep an eye on. It provides software-based workforce development, training, learning management, talent management, credentialing, privileging, provider enrollment and performance assessment. It also manages simulation-based education programs for the health care industry.
Healthstream appears to be a decent business, but it is not one that appears to deserve the 70 multiple being placed on current and expected earnings. The stock is priced for perfection and any misstep or estimate miss could lead to substantial selling.
Rayonier (RYN) is a REIT that manages and sells timber, improved real estate and manufactures cellulose specialty fibers. It also sells lumber used in residential and industrial construction. I think this is actually a nice business and at a good price I would love to own it. But the stock is trading at 65x this year's earnings and 40x the expectations.
While Rayonier has a nice collection of assets that are trading at 2.1x book, it is far from a bargain. I like the business, but not the price at this level. I think the slow pace of the housing recovery is more than baked into the price of the REIT at this level. There is no point owning the shares until and unless they decline substantially.
The lists of overvalued stocks the last two years have been spectacularly poor performers, as predicted. There is no guarantee this year's group will also fall short. But these stocks exhibit the types of slowdown in fundamental improvements and slipping momentum that led to the lowering in 2014 and in 2015.