Today, I want to close out my list of wildly-overvalued companies that are probably best avoided by investors as we go into 2016. In addition to trading at very high multiples of current and expected earnings, these stocks have Piotroski F-scores that indicate business is not as perfect as the momentum buyers are suggesting.
When the high-multiple, high-growth stocks and story stocks begin to miss earnings estimates, or have other difficulties, the rapid exit of large institutions can cause the stock price to collapse quickly. The exit door becomes very crowded when these stocks fall from favor.
The best story right now is Taser International (TASR). In addition to the namesake stun guns, the company makes body cameras for police departments -- and those are in high demand, right now. It is a good company and they have great products. But the stock is priced for perfection and beyond right now.
The analyst expectations are for five-year earnings growth of about 14%, and next year they anticipate growth of 15% or so. That is not high enough to justify the current multiple of 46x earnings and 47x the 2016 estimates. The stock had already experienced a wave of selling when Taser missed the third-quarter earnings estimates. I would not be shocked to see more selling in 2016.
It is a good business, but an even better story. Today's price reflects more story than business. The company has an F-score of just 3, so the fundamentals are telling a much less positive story.
When it comes to high-growth, high-momentum stocks, Under Armour (UA) has been the widow maker for anyone foolish enough to be negative on the shares. The company's line in performance apparel, footwear and accessories has been extremely popular in recent years. They have picked up endorsements by professional athletes and sales and profit growth have been strong. The F-score has steadily declined the past few quarters, however, and now stands at a rock bottom 1.
There has been some selling of the stock late in the year, and insiders have done some selling as well. This is a fantastic company with solid products and management, but that does not necessarily translate to being worth 83x current earnings and 60x the projected results. There is no margin of error in this stock. If UA misses any estimate, the stock could well get clobbered.
SPS Commerce (SPSC), the cloud-based supply chain management concern, appears to be having a good year -- with strong sales and profit. But they have not been beating the quarterly estimates by as wide a margin as in years past. With the shares at 355x current earnings and 75x expected earnings, that could be a huge problem for the stock price in 2016.
The F-score of 5 tells me that business is okay for this company, but it is not fantastic enough to justify anywhere near this multiple. SPS Commerce is another story-driven stock that has gotten way ahead of reality. Should the story change even a little bit, investors could end up with a permanent impairment of capital.
Tyler Technologies (TYL) is certainly in the right business for our time. They sell programs to government agencies for accounting, automation of processes like ticket collection and business permitting. They also provide student information and transportation solutions for K-12 schools.
They offer judicial management systems for everything from case management and supervisions systems. Their programs can be used across just about every level of government from federal agencies down to the smallest municipality.
Because government agencies are constantly looking to become more efficient and productive, this is a good business and should be for many years. I am not convinced, however, that it is such a great business that we should be comfortable paying 90x current and 59x expected earnings. As a former broker, I can see how easy the story would be tell in an exciting fashion. But the story is now priced well above the business value.
You can pay too much for even the best companies. If you get caught owning them when sentiment changes, it can be tough to get out at a reasonable price. When you pay these kinds of earnings, everything has to go right all the time. That rarely happens in life or in the markets.