I am well aware that the current marching orders for investors are to buy growth stocks with great vigor, as stocks are the only game in town. In a zero-yield world, the only place you get to put money with any hope of a return is the stock market.
The problem with that theory is that it works until it stops working and the stopping can be ugly. In the short-run we may see higher prices, but ultimately, a business has a definable value, and at its core the stock market is a collection of businesses.
Investors need to take great care under current conditions and avoid stocks that are not just overvalued but also on the verge of being ridiculously overvalued.
With that as the backdrop, here are three overvalued growth stocks that investors should avoid.
High-Priced Growth Stocks to Dump: Netflix, Inc. (NFLX)
Netflix, Inc (NASDAQ:NFLX) is a great example of a highly valued stock that could be vulnerable to a steep decline.
I use Netflix at home and have done so for some time. I think it’s a great service. However it’s a very competitive business and will become even more competitive in the future. For example, I also have Amazon.com, Inc.‘s (NASDAQ:AMZN) streaming service at home, and I use it about as often as I use Netflix.
NFLX will do well over the years, I have no doubt; however, I do doubt that it will ever do well enough to justify the current trailing price-to-earnings multiple of 292 or the forward price-to-earnings ratio of 106 over the next year.
Even the best ideas and the best companies can sell at too high a price and that appears to be the case with Netflix shares.
High-Priced Growth Stocks to Dump: Taser International, Inc. (TASR)
I can make a similar case for shares of Taser International, Inc. (NASDAQ:TASR). It’s true that Taser has an extraordinary opportunity in front of it as police forces around the country turn to body cameras for the safety of officers and the public.
Taser does dominate the market, but it is not the only company that makes body cameras and already has a relationship with police forces and local governments around the country. Smith & Wesson Holding Corp (NASDAQ:SWHC) makes body cameras, and so does L-3 Communications Holdings, Inc. (NYSE:LLL).
The space will get more, not less competitive in the future, and while I think Taser will do very well, I’m not sure it will be enough to justify paying 114 times trailing and 65 times forward earnings.
High-Priced Growth Stocks to Dump: Zoe’s Kitchen Inc (ZOES)
Zoe’s Kitchen Inc (NYSE:ZOES) is another company that I think will do pretty well in the future, but the stock is price not perfect and it is beyond vulnerable.
I looked at the ZOES menu, and I can see my wife and eldest daughter spending time and money at Zoe’s. The Mediterranean-inspired menu is going to attract health conscious folks, as well as vegans and the gluten free crowd. There is a niche for this chain, but it is just a niche. And it is not a powerful enough niche to justify the stunning 391 trailing P/E and the 153 forward P/E.
The chain will do very well but the stock is going to struggle to grow into the lofty valuations the market is currently placing on the stock.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.