All of the stocks below have been in a major uptrend for the past year or so. Some may have solid businesses and growth potential, but many have reached very overvalued levels, and have high PE ratios. Some of these names are even up about 6 to 10 times from their one year lows. I believe the easy money has been made in these stocks. Some of these companies (such as the rare earth stocks) are losing money, and have minimal revenues, especially when compared to their market caps. Others, like Whole Foods (WFMI) and Under Armor (UA) are trading at PE multiples that stretch any reasonable valuation levels. You can buy stock in a great company but if you pay too much for it, it is likely to be a underperforming asset. For example, investors who paid 30 to 50 times earnings for stocks like Cisco (CSCO) or Microsoft (MSFT) most likely lost money, even after holding these names for about 10 years. Whole Foods is a great company but it's still a grocery store and I don't think it makes sense to pay around 30 times earnings for a grocery store.
Most of these shares have high PE ratios (if they have any earnings), are trading well above their 50 and 200 day moving averages and appear overvalued. With so many great companies trading at bargain levels right now, it's hard to understand why anyone would continue to hold these stocks after such great gains and valuation levels have been reached. It's important to take profits when times are good and raise cash for the next big opportunity. These shares appear to be giving investors a chance to do just that. Here are the stocks which I believe are overvalued.
Under Armor, Inc., is trading at $66.94. UA is based in Maryland and manufactures apparel and footwear. These shares have a 52 week range of $29.12 and $80. The 50 day moving average is $69.49 and the 200 day moving average is $54.02. Earnings estimates for UA are for a profit of $1.65 per share in 2011, and profits of $2.02 per share in 2012. With these shares trading at nearly 35 times 2012 earnings, I would be selling these shares. It makes little sense to pay 35 times forward earnings for a company in the apparel sector.
Avalon Rare Metals (AVL) shares are trading at $8.86. AVL is based in Canada. The shares have traded in a range between $1.09 to $10.11 in the past 52 weeks. The 50 day moving average is $8.09 and the 200 day moving average is $5.17. Earnings estimates for AVL are unavailable and the company has been losing money. The company describes itself as being "development stage" and says "its principal source of capital is from the issuance of common shares." It goes on to say: "In order to achieve its objectives, the Company expects it will be required to spend its existing working capital and raise additional funds as required." You can read that in their most recent report here. There are many signs that point to this as being a high risk investment, and it makes sense to take profits and the easy money off the table.
Rare Element Resources, Ltd. (REE) shares are trading at $14.12. REE is based in Canada. The shares have traded in a range between $1.15 to $17.92 in the past 52 weeks. The 50 day moving average is $12.94 and the 200 day moving average is $9.99. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be ready to drop lower. Earnings estimates for REE are not available. This company has been losing money and you can read about their quarterly last report here.
China Shen Zhou Mining and Resources (SHZ) shares are trading at $4.66. SHZ is based in China. The shares have traded in a range between 60 cents to $10.84 in the past 52 weeks. The 50 day moving average is $4.96 and the 200 day moving average is $3.69. Earnings estimates are unavailable for SHZ. This company has been losing money and it says it was a reverse takeover not long ago, which you can read about here. The shares of this company have started a downtrend recently and are likely to continue lower.
Peets Coffee & Tea, Inc. (PEET) shares are trading at $46.54. PEET is a coffee roaster and operates retail coffee shops. The shares have traded in a range between $33.20 to $49.24 in the past 52 weeks. The 50 day moving average is $46.36 and the 200 day moving average is $40.34. Since the shares are currently trading well over the 200 day moving averages, and close to the 52 week high, they could be ready to drop lower. Earnings estimates for PEET are just $1.57 per share in 2011, so the PE ratio is about 31. These shares appear ready for a correction at 31 times earnings.
Whole Foods Markets, Inc. shares are trading at $59.59. WFMI provides premium and organic foods in supermarkets nationwide. The shares have traded in a range between $33.96 to $66.87 in the past 52 weeks. The 50 day moving average is $61.83 and the 200 day moving average is $48.05. Earnings estimates for WFMI are just $1.81 per share in 2011, so the PE ratio is about 35. These shares appear ripe for a correction at 35 times earnings. Insiders have been selling tens of millions of dollars of these shares in just the past few months which you can see here.
Travelzoo, Inc. (TZOO) shares are trading at $78.01. TZOO is an Internet company that offers travel and other deals online. The shares have traded in a range between $11.60 to $103.80 in the past 52 weeks. The 50 day moving average is $61.51 and the 200 day moving average is $39.37. Since the shares are currently trading well over the 50 and 200 day moving averages, they could be poised to drop. Earnings estimates for TZOO are $1.15 per share in 2011, so the PE ratio is about 65. The easy money has likely been made here and the risk of a large drop appears to be significant.
The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.