1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Anh Hoang
Anh Hoang
Articles (264)  | Author's Website |

Three Significantly High Valuation Stocks Which Might Trigger Large Sell-Offs

October 27, 2011 | About:

Currently the investing public has experienced a lot of pain from the previously growing stocks. Those types of stocks used to get very high valuations, or their price advanced very fast in the short period of time. Then they got hit by either the changes in strategy led by management executives like Netflix (NASDAQ:NFLX) or management cuts their outlook estimation for the firm like Crocs (NASDAQ:CROX), etc. The greed psychology factor in human beings has kept investors from selling the shares for quite a long time even though they appear to have ridiculously high valuations. And it takes investors years to figure it out whether it is right or wrong to keep sitting on those positions.

So what is the next generation of high valuation stocks that might experience a large downward trend in stock price even though they're now the darlings of the stock market?

Green Mountain Coffee Roasters (NASDAQ:GMCR) is one of the most apparent stocks that have been recently experiencing sell-off triggers, when it dropped nearly 50% from $111 to $62. GMCR's growth story began from the acquisition of Keurig, the single-serve coffee maker. In its history, it had advanced from $7 in the beginning of 2008 to more than $111 in September 2011. Even at the current price of $62, the market is still valuing GMCR at 63x earnings and nearly 90x cash flows. A month from now, the insiders, including the CEO, CFO and general counsel have been selling shares.

Chipotle Mexican Grill (NYSE:CMG), the restaurant operators. At 2010 year end, the company was operating around 1,084 restaurants with the majority in the U.S., including 212 free-standing units, 663 end-cap locations, 174 in-line locations and 35 other. At the end of 2008, the stock was trading at $39 a share, and now it is staying around the $330 level for the stock price. Over the past five years, the stock has enjoyed the very high valuation compared to the industry average, with average P/E of 40 and P/CF of 15. Now at $330, it is trading at the higher than average of P/E 52x and P/CF 27.5x. In addition, the insiders (chairman, CEO and CFO) have kept selling shares for the last three months. The signals of insiders combined with high valuations suggested the high probability of downward trend in its price.

LinkedIn (NYSE:LNKD) seems to be the highest valuation of listed stocks at the moment, with earning multiples of 625x, P/B of 20.5x and P/CF of more than 100x. It can be considered the strongest professional networking site over the Internet with more than 90 million members in over 200 countries and territories. With the market capitalization of more than $8 billion, it is more than well-established companies with substantial assets such as banks, retails and other brick and mortar businesses. With such a sky high valuation, unless the company can grow its members as well as revenues and profits in the extremely high level, this price would not be sustainable.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager in global equities, especially in U.S. and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam.

Visit Anh Hoang's Website

Rating: 4.2/5 (14 votes)


Please leave your comment:

Performances of the stocks mentioned by Anh Hoang

User Generated Screeners

HOLKLSUTest First Group Q1 Trending 2
jerkolberGraham 1
cspunarDividend Cover
doniemaherScreen #28 - Profitable, Lo De
HOLKLSUSmall & Mid Cap 2018 Rising Ra
FranktheTankKramer XGrowth
FranktheTankH Kramer
HOLKLSUTest First Trade Late Stage
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat