3 High Profile Stocks Selling at the Very Top of Their 5 Year Valuation Ranges

by: Bret Jensen

The market has had a nice rally over the last week or so. However, the market should experience at least one or two major challenges before the end of the year. I believe some high beta stocks that have overshot any sort of reasonable valuation based on five year historical values are vulnerable to significant pullbacks. Here are three that I would avoid or for more aggressive investors short.

Amazon.com (NASDAQ:AMZN) - Amazon.com, Inc. operates as an online retailer in North America and internationally. It operates retail web sites, including amazon.com and amazon.ca. The company serves consumers through its retail web sites and focuses on selection, price and convenience. It also offers programs that enable sellers to sell their products on its web sites and their own branded web sites. In addition, the company serves developer customers through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually various type of business.

Overview – Amazon sells at very top of its five year valuation range based on P/E, P/B, P/S and P/CF. AMZN goes for an amazing 92 times current earnings and 56 times 2012’s projected earnings. It has also missed earnings estimates two of the last four quarters. AMZN sells at a PEG of almost three, is priced at 13 times book value and over 32 times operating cash flow. The online tax fiasco in California is likely to be repeated as states are desperate for revenues given their budget situations.

Netflix (NASDAQ:NFLX) - Netflix, Inc. provides online movie rental subscription services in the United States. The company offers its subscribers access to a library of movie, television and other filmed entertainment titles on DVD. Its members can get DVDs delivered to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs.

Overview – Netflix is selling at 83 times current earnings and over 43 times projected 2012’s consensus EPS. NFLX, like Amazon, sells at very top of its five year valuation range based on P/E, P/B, P/S and P/CF. It is facing increasing competition from Google (NASDAQ:GOOG) (YouTube) and Amazon in the U.S. market. It also is facing significantly increasing costs for original content. Netflix sells at nearly 6 times sales, 51 times book value and a PEG of two. Insiders have almost sold 20% of their shares in the last six months. Despite its almost doubling of earnings from FY2008 to FY2010, its operating cash flow actually went down in the same time period. To me, this is a major red flag along with a very stretched valuation.

Salesforce (NYSE:CRM) - Salesforce.com, inc. provides customer and collaboration relationship management (CRM) services to various businesses and industries worldwide. It also offers a technology platform for customers and developers to build and run business applications. The company’s Salesforce CRM services enables customers and subscribers to record, store, analyze, share and act upon business data and to help businesses manage customer accounts, track sales leads, evaluate marketing campaigns and provide post-sales service. It markets sales force automation features of its application services under the Sales Cloud brand name; and customer service and support automation features under the Service Cloud brand name.

Overview – Salesforce is selling at over 117 times projected 2011’s EPS and over 82 times next year’s consensus. Like the other two selections, CRM sells at very top of its five year valuation range based on P/E, P/B and P/CF. It also should be facing increasing competition in the enterprise CRM market by two giants in software, Microsoft and Oracle. CRM sells at over 11 times sales and a PEG of more than 4. It goes for over 42 times operating cash flow and technically is at a price level it has failed at twice in the last six months. CRM has benefited from the “cloud computing” story, but a story can only elevate a stock for so long before it has to produce real earnings.

Disclosure: I am short CRM and AMZN with out of the money put options