I had a manager at a firm I used work with. This guy had been in the investment racket for what seems like forever. He was always available to give young brokers advice on stock selection. He would refer to stocks that carried too much risk as “chocolate covered hand grenades.” They looked enticing but sooner or later were guaranteed to blow up in your face.
Coming of age in the business during the Tech Bubble of the mid-1990s, I learned a lot about ridiculous valuations. Stock prices and investor expectations can get a little over their skis if the right conditions are present in the market.
The S&P 500 index has delivered around a 5.5% return year-to-date, sparking the pundits to wring their hands and wonder aloud if the market is overvalued. The S&P 500 is currently trading at about 18 times expected earnings.
If you’re a value-oriented investor, then that may seem a little expensive, especially if forward P/E is one of your primary valuation metrics.
Otherwise, there’s not really cause for widespread concern about the market.
However, I’ve identified three widely traded stocks that I would categorize as chocolate covered hand grenades.
At their current levels, I’m amazed they haven’t already exploded…