3 Overvalued Stocks That Could Be Crushed This Summer

Includes: SFLY, VMW, VOLC
by: Bret Jensen
Two weeks ago, I penned an article “10 Tech Stocks That Could Be Crushed in the Coming Summer Market Swoon.” Despite the market rally through the end of April, it has been a good call and one that should get better with time given the summer selloff that looks imminent. Since the article was published, five of these stocks have gone up and five have gone down. OpenTable (NASDAQ:OPEN) and Stratasys (NASDAQ:SSYS) were the biggest losers, dropping about 15% apiece. This ten stock index is down 1.44% since the article ran compared with a gain in the S&P 500 (NYSEARCA:SPY) of 2.11%, a nifty outperformance of 3.55%, which I think will grow over the summer months. Here are three more stocks that looked stretched in their valuation with high price to sales, price to cash flow, and price to earnings ratios.
Volcano Corporation (NASDAQ:VOLC) - Volcano Corporation designs, develops, manufactures, and commercializes a suite of intravascular ultrasound (IVUS) and functional measurement (FM) products used in the diagnosis and treatment of vascular and structural heart disease. It's a horrid name for a medical products firm. VOLC sells at a pricey 140 times this year’s earnings and 65 times next year’s consensus. VOLC just released a very solid earnings report but at over 4.5 times revenues and sky-high P/E, I think there will be better entry points. Insiders have sold $10mm worth of shares in last six months with no buys, which is also concerning on the margin.
VMWare INC. (NYSE:VMW) - VMware, Inc. provides virtualization infrastructure software solutions and related support and services primarily in the United States. The company’s virtualization software solutions support a range of operating system and application environments, as well as networking and storage infrastructures. VMW sells at 47 times this year’s earnings, over 40 times next year’s consensus, and a whopping 13.4 times trailing revenues. Valuation based on P/E, P/S, and PCF are at the very top of its five year valuation range. Good balance sheet and products, but priced for perfection. Gross margin came down a bit last quarter and the company expects operating margin to expand only slightly in 2011.
Shutterfly (NASDAQ:SFLY) – I have highlighted this in another article, but the stock seems a good one to reiterate, given its overvaluation. 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. The stock is selling at just under 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. Insiders have sold over 64% of their shares over the last six months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.