A number of tech stocks are now trading at bubble-like valuations. When you see what happens to tech stocks after reporting earnings or guidance that fails to meet expectations, the results are often devastating to a portfolio. Just look at what is happening to Finisar Corporation (FNSR) in the after hours trading session. FNSR shares closed at just over $40 per share Tuesday, but after the market closed, they released earnings and guidance that failed to impress the market. FNSR shares plunged about 36%, from over $40 to about $25 in the after hours market. Read more about Finisar's earnings report and the stock price reaction here.
Clearly, some investors have forgotten what can happen when stocks trade for 40, 60, even almost 80 times earnings. The tech stocks below are trading at valuations that appear to be priced for perfection. In hindsight, we know that people who paid about 50 times earnings for Cisco (CSCO) and other tech stocks when they were the darlings of Wall Street were left with negative or very little returns over the next decade.
These names have high to very high P/E ratios. Some are trading above their moving averages and appear overbought. How much more can investors expect from some of these names? Here are the companies:
Ultimate Software Group, Inc. (ULTI) shares are trading at $56.83. These shares have a relative strength index of about 67 which indicates the shares are at overbought levels. Ultimate Software is a business software company. The 50 day moving average is $51.01 and the 200 day moving average is $41.09. Since these shares are priced well above their moving averages, they could be ready to fall. Earnings estimates for ULTI are about 74 cents per share in 2011, which puts the P/E ratio around 77 on these shares.
Digital River, Inc. (DRIV) shares are trading over $34. The 50 day moving average is about $34.65 and the 200 day moving average is about $31.82. Digital River provides online e-commerce solutions. Earnings estimates for DRIV are about $1.14 per share in 2011, so the P/E ratio is almost 30 on these shares. These shares have just dipped below their 50 DMA, so the next stop might be around the 200 DMA at $31.82.
Citrix Systems, Inc. (CTXS) shares are trading at $72.49. Citrix provides online services and other business solutions. The 50 day moving average is about $68.08 and the 200 day moving average is about $60.42. Since these shares are priced well above their moving averages, they could be more likely to drop. Earnings estimates for CTXS are about $2.32 per share in 2011. This puts the P/E ratio at about 31.
CommVault Systems, Inc. (CVLT) shares are trading at $36.01. CommVault is a provider of information software. The 50 day moving average is $32.59 and the 200 day moving average is $26.97. These shares are trading well above the 50 and 200 day moving average, which might make them more prone to a correction. Earnings estimates for CVLT are about 74 cents per share in 2011. This puts the P/E ratio at about 49.
Acme Packet, Inc. (APKT) shares are trading at $74.29. Acme provides Internet solutions for business. The shares currently trade well above the 50 day moving average of $64.22 and the 200 day moving average of $43.37. Earnings estimates for APKT are about $1.07 per share for 2011. This puts the P/E ratio around 69. APKT shares have traded for as little as $17.17 per share in the past year, so at over $74 currently, it might be smart to take profits.
Advent Software, Inc. (ADVS) shares are trading at $27.98. Advent provides business software solutions. The 50 day moving average is $29.42 and the 200 day moving average is $26.38. These shares have just dipped below their 50 DMA, so the next stop might be around the 200 DMA or lower. Earnings estimates for ADVS are about 82 cents per share in 2011. This puts the P/E ratio at about 34.
I believe the extremely generous stock prices in these names represents a solid opportunity to cash in and rotate into less expensive stocks, as these could drop sharply from very lofty levels, just as Finisar and other high P/E ratio stocks have in the past.
The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made.