By Dee Gill
There’s a bear case to be made for any stock, and nothing brings a share’s flaws into quick focus quite like a market correction. When the S&P 500 was down 5.75% in the first five weeks of the year, a lot of shareholders saw their own individual holdings suffer a whole lot worse.
So with a market correction possibly in the making – some pundits think last month’s slide was just the beginning -- it makes sense to peruse the portfolio for overpriced shares and weakened companies likely to get clobbered in a sell-off. To get started, we offer five shares here that look ripe for dropping particularly hard in a broad market sell-off.
OPEN data by YCharts
Monopoly or not, almost no one in mainstream investment research believes OpenTable shares are worth much more than they trade for today. We found only one buy recommendation from an investment analyst on the shares now, compared to some 16 hold or sell ratings. Yet the shares still carry very high valuations, trading at a forward price-to-sales ratio of nearly 8.
OPEN PE Ratio (Forward) data by YCharts
The continuing love fest for OpenTable shares is understandable, however, considering its near-monopoly in the business of online restaurant reservations. OpenTable gets paid whenever someone books a table online via phone or computer at one of its restaurant customers, which include about half of the restaurants in North America that take reservations. The company has been acquiring tiny competitors and a few add-on services, like restaurant customer reviews. International expansion is underway, and revenues are soaring.
OPEN Revenue data by YCharts
But OpenTable’s profit forecasts this earnings season disappointed, largely because of higher costs. Rumors of oncoming competition from Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) have also unsettled shareholders. With investors already nervous, these shares could go fast in a market rout.
Under Armour (NYSE:UA)
UA data by YCharts
Under Armour makes wildly popular athletic gear used by professionals and amateurs alike. Last month, it beat expectations for the earnings season and sent its share price climbing an incredible 25%.
It was a perplexing jump. Under Armour shares were already valued well-above others in the business, like Nike (NYSE:NKE), lululemon athletica (NASDAQ:LULU), Gildan Activewear (NYSE:GIL) and Adidas (OTCQX:ADDDF). Now its forward price-to-earnings ratio towers above anything else in the industry. Rarely are such outsized share prices sustainable long-term; particularly in a market correction; particularly for a fashion item.
UA PE Ratio (Forward) data by YCharts
Tesla Motors (NASDAQ:TSLA)
TSLA data by YCharts
After Yelp (NYSE:YELP), Tesla Motors is the most expensive of any major share in the market. Both its forward PE ratio and forward price to sales ratios are in such nosebleed territory that they’ve become mathematically useless. (Tesla is trading at a forward price-to-earnings ratio of more than 1,800; a forward price-to-sales ratio of nearly 9.) It’s a set-up for a share price correction regardless of whether the market-at-large corrects.
TSLA PE Ratio (Forward) data by YCharts
NFLX data by YCharts
Netflix shares continue to trade at extreme valuations even as it gets harder to make money. Profit margins have narrowed as the cost of content has risen – both from demands by movie and television producers for higher prices, and Netflix’s decision to produce its own content. With Amazon.com (NASDAQ:AMZN), Google, Hulu.com and so many others encroaching on its business now, Netflix has to spend more and more money to keep viewers attracted to its service.
NFLX Gross Profit Margin data by YCharts
We have underestimated Netflix’s ability to handle competition before. But even discounting innate issues, Netflix looks like a target for profit taking in a market sell-off. Its share price is up more than 135% in the past year. You can dig into its downside using financial advisor tools.
LNKD data by YCharts
LinkedIn, a $24.82 billion market cap company that often lands on expensive stock lists, should be outgrowing that distinction. While it’s certainly still a high-growth company, the rate of gains is slowing.
LNKD Revenue (Quarterly YoY Growth) data by YCharts
The company’s forecast of a mere 40% revenue growth in the first quarter sparked some selling earlier this month. The share price is down about 10% in the past six months. But with shares still trading at more than 100 times forward earnings and nearly 12 times forward sales, LinkedIn still trades as if valuation doesn’t matter. The combination of cooling sentiment and extreme valuation could be toxic in a market correction.
LNKD PE Ratio (Forward) data by YCharts