While I usually tend to be on the bullish side of the market, I noticed four stocks priced well-above their intrinsic value. Adding two commodities to that list, and we get the following over-priced stocks and commodity ETFs signaling strong warning signs to avoid.
[Editor's note: Motorola Solutions (MSI) has been removed from the article at the author's request, due to confusion about the stock.]
1 – Salesforce.com (CRM): With a trailing P/E ratio of 302, and forward P/E ratio of 77.2, Salesforce.com is priced just like crazy tech stocks of late 90s. Salesforce is an application and interface provider that helps businesses keeping track of their customers. Basically, it is a customer and collaboration relationship manager (CRM) platform. While the business model is based on a nifty idea, it is surely not worth $18.8 billion. Insiders are selling their stocks like crazy. In last six months insiders reduced their holdings by 46.9%. CFO, department directors, global sales managers, almost everyone inside is unloading CRM stocks. Why would anyone hold a stock that CFO is dumping?
2 – Amazon.com (AMZN): I am a big fan of the Amazon.com website. Thanks to "Jeff" Bezos, the founder, president and CEO of Amazon.com, I saved quite a lot of money on my book expenses during PhD studies. I have an amazing experience with Amazon.com, where I am both an active customer and seller. However, as a stock, with a trailing P/E ratio of 73, and forward P/E ratio of 40, it is overpriced. It is true that Kindle has a great future, but Amazon's business ideas can be replicated easily. I am surprised that no one has done it yet.
3 – Netflix (NFLX): Similar to Amazon.com, Netflix also has a brilliant business model. I am also a big fan of Netflix, and I used to be a solid customer. However, as soon as I discovered the DVD rental box next to my apartment, I terminated my contract. Those Rent-a-DVD machines will sooner or later replace Netflix. The company is trading with a P/E ratio of 82.58, and forward P/E ratio of 38.43. In last six months, insiders have reduced their holdings by 95%. CEO Hasting Reed sold out almost all of his shares. This is a stock to stay away from for sure.
4 – Sirius (SIRI): SiriusXM does not have any profits yet, but trading with a forward P/E ratio of 31. Five years ago, it was claimed that Sirius needed only 2 million customers to break-even. It became obvious that Sirius' business model requires at least 20 million subscribers to make serious profits. While company claims to have more than this level, I doubt about the numbers. A significant portion of customers come from SiriusXM's arrangements with major automakers for installation of satellite radio in their vehicles. Sirius' business model is not hard to replicate. Surely, it will require some billion dollars of initial investment. However, there are cash-rich companies (i.e. Microsoft (MSFT)) trying to figure out what to do with gazillion dollar of current assets. As soon as Sirius starts making good profits, a new competitor will dive in the market, eliminating the excess profits.
5 – Gold (GLD): Similar to tulip-mania of 18th century, and tech-mania of late 90s, we are experiencing a gold-mania in 21st century. The gold prices are being driven to insanely high levels, thanks to the revival of investment banks. The fund managers, whose year-end bonus is based on their funds' performance is driving the prices higher, and higher, and higher. While it was a brilliant idea, to invest in gold 10 years ago, I would not buy any gold today, especially when the prices are hovering around $1,500. Gold miners (GDX) and (GJX) are also insanely-priced with average P/E ratios of 75.
6 – Silver (SLV): Thanks to JP Morgan's (JPM) silver shorts, silver prices could not catch up with the gold-rush for a while. However, something happened between JPM and other silver speculators, driving up the silver prices like a rocket rising to sky. Unlike gold, silver has significant industrial use. Those manipulated prices will soon start hurting U.S. industrial companies asking for official involvement. If you are one of those who believe silver will never go down, check the following graph:
Going short in any bull market can result in huge losses in remarkably short periods. I do not suggest anyone going short in any market. I have done many things in the past and made significant losses. Statistical analysis shows that going short in any market is extremely risky, particularly for small investors.