Yes, we’re in the most bullish period of the year for stocks. And the Federal Reserve remains optimistic enough to at least acknowledge a December rate hike remains a possibility.
Thus, we have no choice but to concede that maybe, juuust maybe, there’s a little more upside left for the market to dole out before stocks reach their maximum plausible value.
On the other hand, a handful of names may have already overshot their best prices, and as such are ripe for a sizable pullback. These are the stocks investors should worry about, because they might lure in new money with their recent momentum … only to burn it all up over the next few months.
In no particular order, here’s a closer look at 10 names that should scare the crap out of investors at their current, unsustainable prices.
Scary Stocks: PMC-Sierra (PMCS)
Yes, PMC-Sierra (PMCS) may be the target of a bidding war between Skyworks Solutions (SWKS) and Microsemi Corporation (MSCC), which bodes well for current owners of MC-Sierra. But, now up more than 80% since late September on the heels of two distinct acquisition-offer leaps, shares of the tech company have likely already reached (or even exceeded) a price a would-be suitor can justify.
That’s the funny thing about bidding wars … most of the time, by the time investors realize one is underway, it’s usually over.
The kicker working against PMC-Sierra in this case is last quarter’s results. While the company topped its bottom-line and top-line estimates, would-be buyers have certainly noticed that revenue, along with a few other key metrics, flattened in the third quarter.
Scary Stocks: Zillow Group (ZG)
Although it has fallen from its recent peak to the tune of 14%, shares of real-estate website Zillow Group (ZG) are still dangerously overbought after running up roughly 40% following the official merging of Zillow and Trulia.
In retrospect, the post-union strength from ZG comes as no real surprise; the “bigger is better” mentality is a fairly pervasive mindset among the masses. But, it’s usually a short-lived one, with a stock’s price always eventually reverting back to some sort of fundamental-based valuation.
That’s where ZG just doesn’t pass the smell test, even if investors don’t innately know they know it. Even if Zillow Group were in a position to reach the expected profit of 34 cents per share next year, that still translates into a ridiculous forward-looking P/E of 90.
Further weighing on the stock now is a limited organic growth opportunity beyond 2016 as this market becomes saturated.
Scary Stocks: Dyax (DYAX)
Just for the record, Dyax (DYAX) isn’t a bad company. Though it’s been posting losses and will likely continue to do so for the foreseeable future, that’s not uncommon in the world of biotech, and not often a reason for investors to steer clear of a biotech stock.
DYAX is, however, a stock best left avoided in the shadow of a year-to-date doubling in price that won’t likely be justified by anything it’s got in the pipeline for the foreseeable future.
Though Dyax has other drugs on the market and other means of driving revenue (through royalties), most eyes are on the upcoming phase 3 trial of DX-2930, which is a fully human monoclonal antibody designed to prevent HAE (hereditary angioedema) attacks.
There’s a market there to be sure, but inasmuch as the company already has a very comparable Kalbitor on the market for the same basic indication and has yet to come anywhere near justifying a $4 billion market cap, it’s unlikely Dyax will be able to keep the market interested long enough just to take a chance on DX-2930’s approval in the not-so-near future.
Scary Stocks: Grupo Financiero Galicia S.A. (GGAL)
Grupo Financiero Galicia S.A. (GGAL) isn’t a household name for American investors. That’s because it’s an Argentinean bank. Nevertheless, the 30% gain GGAL shares have dished out since Oct. 23 certainly caught the attention of investors in the U.S. and elsewhere.
The prod for the rally came from change in Argentina’s political landscape. Namely, frontrunner presidential candidate Daniel Scioli (who is popular, but doesn’t have a platform that’s especially pro-growth) is being surprisingly well-challenged by Mauricio Macri, who is seeking to restore the nation’s credibility as an international trade partner and simultaneously quell the country’s rampant inflation.
While the prospect of change — any change — bodes well for GGAL, the market may have reacted overzealously, fueled more by hope and a premise than plausible outcomes. As that euphoria fades and reality sets in again, Grupo Financiero Galicia may similarly cool off.
Scary Stocks: Crown Media Holdings (CRWN)
Crown Media Holdings (CRWN) isn’t a name that rings a bell for most investors. But the name Hallmark Channel does ring a bell for most TV-watchers, and it’s a publicly-traded entity through Crown Media. CRWN shares, however, may have gotten more than a little ahead of their underlying results this year, and as such are ripe for a pullback.
Year-to-date, CRWN shares are up 70%. The company is well into more-than-a-decade long streak of revenue and earnings growth, and it’s unlikely that’s going to change anytime soon.
But, with an average earnings and sales growth rate of much less than that, the 10-month rally may have already put CRWN at (or even beyond) its maximum sustainable value; the trailing P/E now stands at 20.7. The upcoming earnings report may serve as the catalyst for some profit-taking … a “buy the rumor, sell the news” situation.
Scary Stocks: Activision Blizzard (ATVI)
Without overthinking it, this would be the right time to take on a trade in video game publisher Activision Blizzard (ATVI). Video games are a perennial favorite holiday gift, and the industry tends do very well in the fourth quarter of the year as a result.
Better still, Activision Blizzard is the name behind some if what are sure to be 2015’s top-selling video games … Call of Duty: Black Ops 3 and StarCraft II: Legacy of the Void.
Yet ATVI may be unbuyable at this point for one simple reason … up more than 70% since the beginning of the year (and recently pushed by a wave of bullish table-pounding), Activision Blizzard shares simply have no more room to tack on gains. The best-case scenario is already priced in.
Scary Stocks: Amazon (AMZN)
It’s tough (and unpopular) to bet against a momentum name like Amazon(AMZN), which the market loves to love — the company can simply do no wrong in many investors’ eyes.
But, every couple of years or so, the stock has to remind investors that corporate results don’t quite justify the outsized gains AMZN is dishing out. And after more than a 100% runup since the beginning of the year — the biggest runup we’ve seen in that amount of time since 2009 — that reminder is overdue for AMZN stock.
Yes, the revenue and profit growth of the relatively new Amazon Web Services division is impressive. The AWS top line nearly doubled last quarter, reaching $2.08 billion, and the company turned $521 million of that into operating income.
Both were records for Amazon Web Services. We’re talking about a $294 billion company, though, that generated laughable net income of $79 million last quarter. There’s no amount of conceivable growth in AWS that could justify the forward-looking P/E of 113. When the market remembers that fact (and it will), the AMZN profit-takers are going to come out of the woodwork.
Scary Stocks: Global Payments (GPN)
To be fair, among all the payment-processing middlemen, Global Payments (GPN) is one of the stronger names. The impasse is just the likelihood that the business is at or near saturation, and future market share is going to be won not by innovating or outselling, but rather by accepting less revenue in order to retain market share … which means margin pressure.
Though he was referring to Global Payments peer and rival PayPal (PYPL) when making the point, the same issue that Shark Tank’s Kevin O’Leary takes with PayPal’s future also applies to GPN. That is, as the lines of payment processing are blurred, the business become more commoditized. Eventually, a player will be willing to do perform all sorts of payment services for free in order to monetize those customers another way. Like PayPal, it’s a problem for Global Payments, since it has few other ways to monetize its customers.
And payment processing may already be at that tipping point.
All of a sudden, this year’s 69% gain from GPN looks more like a liability than a momentum trade to jump on.
Scary Stocks: Post Holdings (POST)
Shares of Post Holdings (POST) are up more than 55% for the year, which seems to imply that the company is growing the top and bottom lines like nobody’s business.
It isn’t. The bulk of the growth seen over the past 12 months has been driven by acquisitions. And yet, even on an operating basis, earnings have been stagnant despite the rising top line.
That’s not the most concerning aspect of oddly tepid earnings Post Holdings has been putting up, however. What’s more alarming is that Post has struggled to turn a decent profit lately despite the fact that commodity prices — including all-important corn — have been at a rock-bottom multi-year low of $3.80 per bushel since the middle of 2014.
If Post Holdings can’t produce a decent profit when ingredient costs are dirt-cheap, what’s going to happen when corn and other commodity prices start to make the inevitable rise?
Scary Stocks: Manhattan Associates (MANH)
Last but not least, software company Manhattan Associates (MANH) has been logging reliable, undeniable sales and profit growth over the course of the past several years.
To that end, the stock deserves to be moving higher. The concern is the extent to which MANH has soared this year — it’s up more than 80% year-to-date, pushing the stock to a trailing P/E of 56 and a forward-looking one of 44.
In its defense, Manhattan Associates has posted an impressive string of earnings beats, and the recurring-revenue aspect of the business model is figuratively paying nice dividends. But, the nature of that very same business model puts a cap on earnings growth. Investors may figure this out very soon, now that the stock has blasted its way into new-high territory.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.