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The problem with many stocks that are trading at stratospheric valuations - also known as bubble stocks - is that you don't know when they will pop and for what reason.

There is a very big difference between good companies at an expensive valuation, and good companies at a stratospheric valuation. An expensive stock might correct up to 30% in the short term, however over the longer term you will get your money back and end up with a profit. I would put Google (NASDAQ:GOOG) in that category. Google is a very good company, but I think the market is paying a little too much for it. Can Google correct by 30%? Sure it can. I don't know what the catalyst might be, but it can happen and most likely it will happen at some point in the future.

However buying a stock that trades at 10-20 times sales with no profits, just because it supposedly has the next big idea, is a very dangerous proposition. In a situation where Google might correct 30%, these stocks will correct by 70% or even more. And from my experience, while Google will eventually recover and you will be back in the black, chances are that the bubble stocks will never recover and you will never get your money back.

In the current market, there are many bubble stocks that refuse to correct and many investors think they will never correct. Others have corrected and have gone up again, and investors think that they will always behave like this.

My case against very expensive stocks is that you don't know when they will correct, and you don't know when the market will come to its senses and crash them. And since I don't have a crystal ball, I just stay away from.

Today I am happy to see some of these bubble stocks correcting. My advice is not to buy the correction, because you don't know how low they might go. They might bounce, or they might not. And if you are good at short selling, upon confirmation of technical weakness, I would short at will.

First on the list is Solar City (NASDAQ:SCTY).

P/E

Forward P/E

Price/Sales

P/B

Profit Margin

Operating Margin

Return on Assets

Return on Equity

1y Target Est:

Solar City

N/A

N/A

25

18

-73%

-56%

-4%

-32%

33

This stock is so outrageously valued, it gives outrageously valued a bad name. Not only that, but analysts 12 month target price for this stock is $33 (still extremely expensive), but the market has bid it up all the way to $50 recently. Sell this stock if you have it at will.

If you are a trader and trade in and out of the stock, then this post is not for you. Short term traders don't need my advice or anyone else's. But if you think you will make money buying and holding this stock, all I can tell you is that the possibilities for profit -- buying at today's prices -- are less than the chances of winning the lotto. The stock is falling about 6.5% today on no news. But guess what, it does not need any news to correct.

The ExOne Company (NASDAQ:XONE)

P/E

Forward P/E

Price/Sales

P/B

Profit Margin

Operating Margin

Return on Assets

Return on Equity

1y Target Est:

ExOne

N/A

100

25

10

-31%

-24%

-N/A

N/A

50

This is another outrageously valued stock that I have talked about several times. In fact the whole 3D printing space is a bubble, but this one really sticks out. I don't know if anyone has ever made money buying a stock log term at 25 times sales, but I don't know anyone. The stock is down by about 12%, from a downgrade from BB&T Capital Mkts. The rating has changed to a hold from a buy. I can't imagine how much the stock would have fallen in the rating was sell.

Tesla (NASDAQ:TSLA)

P/E

Forward P/E

Price/Sales

P/B

Profit Margin

Operating Margin

Return on Assets

Return on Equity

1y Target Est:

Tesla

N/A

122

15

86

-31%

-32%

-20%

N/A

87

This little puppy needs no introduction. The catalyst for the stocks 13.5% correction seems to be a note from Goldman Sachs, warning for a possible downside of 25%. Well I have news for Analyst Patrick Archambault of Goldman Sachs, a 25% correction is a very conservative number. This stock can correct for no reason whatsoever more than 50%, even if the whole world is bullish on it. It is a stock in the same predicament as Apple (NASDAQ:AAPL), when you couldn't find anyone who thought the stock was not worth over $1,000 several months ago.

Bottom line

There are many more stratospherically overvalued stocks out there. These are just the ones that are correcting today. I do not know if these stocks will bounce again or continue to fall for many days. What is important to understand about any stock that is valued at 10-20 times its sales, is that it can correct for any reason, even if the entire street is bullish on them. These stocks, among others, fall in this category as per my investment logic.

And if you by accident are thinking of buying these stocks at their current price, for the long term (for a buy and hold portfolio), the only think I can recommend is to please consider buying something more down to earth. These stocks are valued in the outer atmosphere and ready to leave planet Earth.

Source: Bubble Stocks Taking A Hit