May began with major news; the assassination of Bin Laden. The market and futures were initially up but ended the day slightly down. Oil fell and the dollar rallied, but reversed later in the day and had little overall movement over the entire session. Silver continued its erratic roller coaster ride and gave up an early rally to end lower.
In short, it was an interesting day to bring in the new month. The market had rallied through April, mostly ignoring signs that worldwide growth was slowing and inflation was accelerating. It began May down on some of the best news for the free world that has crossed the wire in some time. Combined with the silver bubble starting to deflate and end of QE2 less than two months, is this the start of pullback that the market is long overdue for?
Personally, I don’t know if this will go down as signaling a short term market top and we will see an immediate and significant selloff. But I believe the chances are very good we will see a double digit pullback by the end of summer, for reasons I have articulated several times. I am personally most leery of momentum driven, high beta stocks with stretched valuations and heavy insider selling. Here are four you might want to avoid or abandon along with company executives:
Informatica (INFA) – Informatica Corporation provides enterprise data integration and data quality software and services worldwide. Insiders have sold over 59% of their shares over the last six months. The stock is selling at 40 times this year’s projected earnings and over eight times trailing revenues. It is selling at the very top of its five year valuation range based on P/E, P/S, P/CF, and P/B. This stock seems to be driven more by recent mergers in the sector, than its current growth and revenue prospects (which are good, but at a PEG over 2 seem a bit overdone).
Peet’s Coffee & Tea (PEET) - Peet's Coffee & Tea, Inc., together with its subsidiaries, operates as a coffee roaster and marketer of roasted whole bean coffee and tea in the United States. The company also offers whole leaf and bagged tea; and specialty food items, such as jellies, jams, candies, beverages, pastries, and other related items. Insiders have sold 42% of their shares over the last six months. PEET sells at just under 30 times this year’s earnings and around 25 times consensus 2012’s earnings. Earnings estimates for both 2011 and 2012 have both come down over the last ninety days. In addition, the company should be impacted by rising food inflation, especially in dairy. The stock seems overvalued, given single digit revenue growth projected for both this year and next.
Shutterfly (SFLY) – Shutterfly, Inc. provides an Internet-based social expression and personal publishing service that enables consumers to share, print, and preserve their memories through the medium of photography. Insiders have sold over 64% of their shares over the last six months. The stock is selling at just under an incredible 150 times this year’s projected earnings, over 55 times next year’s consensus and over 5.5 times trailing revenues. It is selling at the very top of its five year valuation range based on P/E, P/S, P/CF, and P/B. Its current PEG is over 4 and the tripling of its stock price seems overdone. The stock seems very vulnerable to a significant pullback.
Trimble Navigation (TRMB) - Trimble Navigation Limited provides advanced positioning product solutions to commercial and government users worldwide. Insiders have sold 78% of their shares over the last six months. Trimble sells at over 23 times this year’s projected earnings and more than 20 times 2012’s consensus as well as almost 5 times trailing revenues. It is also selling at the top quartile of its five year valuation range based on P/E, P/S, and P/CF. The results of its mobile business have been lackluster and the stock earned between 52 cents a share and $1.14 a share annually from 2005 to 2010, kind of rich for a stock priced over $46/share in my opinion
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.