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5 Stocks About to Be Scared Straight by Earnings Reports

Poor earnings could send these overvalued stocks reeling

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Social networking is all the rage. The much-anticipated initial public offering of Groupon will be a testament to the power of momentum investing. A story with the thinnest of plausibility has managed to capture the imagination (read: trapped the suckers) of the market.

For a glimpse into what the future holds, look at the action in OpenTable (NASDAQ:OPEN). Shares have been on a one-way trip down since peaking in May. Despite taking a haircut of almost 60% since then, OPEN stock still is expensive.

OpenTable has managed to exceed Wall Street estimates in the past four quarters, but clearly not by a wide enough margin to support the share price. Wall Street has the company making 30 cents per share for the period ending Sept. 30. That number has held steady during the past 90 days. For the full year, Wall Street is looking for EPS of $1.25, growing 35% to $1.69 in 2012. At current prices, shares of OpenTable trade for 36 times earnings.

While growth expectations are strong today, competition likely will keep pressure on the stock. The only thing that can keep the train moving forward is a blowout earnings report after the bell Tuesday. If not, look for OPEN stock to continue its descent. Another 10% to 20% discount in share price is plausible.

Whole Foods Market

I always get nervous when a company in an industry performs significantly differently than its peers. In the grocery business, Whole Foods Market (NASDAQ:WFM) is doing just that. In a business known for very thin margins, Whole Foods has defied gravity by making and growing profits at a significant rate.

Whole Foods has exceeded Wall Street profit estimates during the past four quarters. For the period ending Sept. 30, Wall Street is looking for a profit of 41 cents per share. That number has held steady during the past 90 days. For the full year, the average Wall Street estimate is $1.93, growing 17% to $2.26 per share in 2012. At current prices, Whole Foods trades for 38 times current-year estimated earnings.

That is a steep price considering growth at such a level in a challenging industry is likely to hit a ceiling at some point in the near future. Given recent gains, it would seem prudent to begin exiting WFM stock before cracks appear. A weak earnings report after the bell Wednesday will send this stock tumbling.

As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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