There’s nothing worse than a momentum stock. If you can’t control you emotions, and you see a stock leaping multiple points every day, soaring ever-higher, there is a great temptation to leap in before it’s too late. This became widespread in the late ’90s, and I’ll never forget the day Amazon (NASDAQ:AMZN) jumped 40 bucks in a single day. I shook my head and thought it was crazy. Little did I know that the mania had just begun.
It still happens today, although the difference is there are real businesses underlying the huge upside moves. That doesn’t mean, however, that the valuations the stock prices imply are correct. When they are totally out of whack, it’s not only time to sell, but possibly even time to short that stock.
OpenTable, Inc. (NASDAQ:OPEN) offers a great restaurant reservation service that I use all the time. As a stock, however, people mistakenly think an innovative concept deserves an outrageous valuation. OPEN stock went public in May 2009 at around $29 per share, went nowhere for about a year, then suddenly roared to a high of $115 earlier this year.
At the time, it was pretty obvious that OpenTable’s trading at 90 times earnings was pretty crazy, even for a stock growing earnings at 50% this year and 33% next year. Today, OPEN stock is down to $47 — and while some might say the bubble already has popped, I say all it did was let out some gas. OpenTable is a quickly growing company, but one with the cash flow and balance sheet of a small-cap company — and a valuation of $1.1 billion. I’m sorry, but generating $37 million in TTM free cash flow of $19 million in profit does not justify the still-crazy 40 P/E. OPEN’s bubble is going to burst. Get out.
If you though that market cap was unjustified, take a look at LinkedIn (NASDAQ:LNKD). The company’s projected profit for this year is exactly two cents per share, or a little less than $2 million. At $87 per share, the market is not only valuing LNKD at a P/E ratio of 435, but at a market cap of — really? — $7.7 billion.
The only thing keeping me from shorting LNKD stock is that I can’t find shares to short, and the relatively low float of 96 million shares could create a short squeeze. But if you are holding LinkedIn right now, ask yourself — how much bigger can the perceived market cap of this stock reach before people wake up? Get out.
Green Mountain Coffee Roasters
Green Mountain Coffee Roasters (NASDAQ:GMCR) has created a lot of controversy over its valuation for quite some time. This past week, a hedge fund made a presentation that all but accused the company of accounting fraud. That took the stock down 33% from its already lofty highs. But — you guessed it — I say the bubble hasn’t yet burst.
Analysts seem totally convinced Green Mountain will grow earnings by 125% this year and 60% next year. GMCR already has issued accounting revisions to past results, and the company is under an SEC inquiry at the moment. When you add all of this up, I smell something — and it isn’t coffee.
I also don’t like that Green Mountain had declining net tangible assets for a couple of recent quarters — in fact, the net tangible assets were more than $300 million to the negative for two quarters. Accounts payable have been rising steadily from 2008 ($72 million) to the most recent quarter ($331 million). GMCR’s bubble is going to pop, and when it does, you don’t want to be near it. Get out.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.