If you are a fan of Halloween, you should love the suspense and surprises offered around every market turn this fall. Stocks have rallied furiously in October, gaining 13% as of Friday’s close and helping erase a horrible September.
This is not a normal market. Whether we are being manipulated by flash trading, short selling or some other unforeseen force, stocks are not a safe place to put your money. Public markets no longer represent the true ideal of investing in equity securities, which is intended to be for the long term. Today, the markets are more like short-term boiler rooms where stocks are flipped more than pancakes.
The goal of the investor (or really, trader) today is not to look forward to a future distribution of assets of a company after liabilities are paid, but to find a willing buyer of stock at a higher price using whatever means available. This includes concocting stories that invoke fear in the masses or vice versa.
But these stories blow up when presented with the facts of corporate operating performance — given to us in the form of quarterly earnings reports. For a brief moment of time after earnings news is released, a stock will trade based on fundamentals as opposed to some other superfluous reason.
Here then are five stocks with sky-high valuations that likely will be scared straight — back to earth — when companies report earnings this week:
Vitamins and supplements are all the rage. Demand is skyrocketing, and companies like Herbalife (NYSE:HLF) that sell to this monster market are growing fast. As such, investors have poured money into these stocks hoping to cash in on the future.
During the past four quarters, Herbalife has easily bested Wall Street estimates, and expectations for the quarter ending Sept. 30 have grown. Wall Street expects the company to make 76 cents per share, as opposed a 69-cent-per-share estimate 90 days ago. For the full year, Herbalife is expected to make $3.08 per share. In 2012, Wall Street is looking for a jump in profits of 16% to $3.57 per share. At current prices, shares trade for 20 times current-year estimated earnings.
It will take a strong report after the bell Monday to keep HLF stock at such levels.