3 Overvalued Stocks With Heavy Insider Selling

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 |  Includes: CTXS, EL, SFLY
by: Bret Jensen
It continues to be a turbulent time in the markets with the debt ceiling and European sovereign debt issues still unresolved. I have added shorts recently to hedge my portfolio against any sudden breakdowns in the market. Looks like a recently initiated bear market call spread in Netflix (NASDAQ:NFLX) will pay off due to subscriber growth guidance that did not meet the market’s expectations. I am also looking at highly valued stocks with strong insider selling to look for additional equities to take short option positions in. Three that meet these criteria are below.

Citrix Systems (NASDAQ:CTXS)

Citrix Systems, Inc. designs, develops, and markets technology solutions that deliver information technology services on-demand worldwide. It offers desktop solutions, including Citrix XenDesktop, an integrated desktop virtualization system; Citrix XenApp, an application virtualization solution; and Citrix XenClient, a bare-metal hypervisor, which runs directly on the client device hardware. The company also provides online services, comprising GoToMeeting for online meetings, sales demonstrations, and collaborative gatherings; GoToWebinar, which allows users to host, attend, or participate in a Webinar session; GoToTraining, a training tool that allows trainers to deliver content to various trainees; Integrated HiDef Audio, which provides an audio and Web experience; HiDef Audio that offers audio options with reservationless audio conferencing; GoToAssist, a remote technical-support solution; GoToManage solution for IT management; and GoToMyPC, which offers remote access to PC and Mac from an Internet-connected computer.

Overview – Citrix sells in the top quarter of its five historical valuation based on P/E, P/S, P/B and P/CF. Insiders have sold over 50% of their shares over the previous six months and of the 23 transactions initiated in that time period, none have been “buys”. CTXS has a trailing P/E of 47 which is rich given it has only grown EPS an average of 9% annually over the past five years. It has projected five year PEG of over 2, and earnings estimates for 2011 and 2012 haven’t budged over the past sixty days. In addition, net income from FY2008 through FY2010 increased significantly faster than the company’s operating cash flow.

Estee Lauder (NYSE:EL)

The Estee Lauder Companies Inc. engages in the manufacturing, marketing, and sale of skin care, makeup, fragrance, and hair care products worldwide. Its skin care products include moisturizers, creams, lotions, cleansers, sun screens, and self-tanning products; and makeup products consist of lipsticks, lip glosses, mascaras, foundations, eye shadows, nail polishes, and powders, as well as related items, such as compacts, brushes, and other makeup tools. The company provides its fragrances products in various forms, including sprays and colognes, lotions, powders, creams, and soaps. Its hair care products comprise of hair color and styling products, shampoos, conditioners, and finishing sprays. The Estee Lauder Companies sells its products under the Estee Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, M A C, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble and bumble, Darphin, American Beauty, Flirt!, Good Skin Labs, grassroots research labs, Ojon, and Smashbox brand names.

Overview – Estee Lauders sells at the very top of its five historical valuation based on P/E, P/S, P/B and P/CF. Insiders have sold over 33% of their shares over the past six months and of the 38 transactions initiated in that time period, none have been “buys”. CTXS has a trailing P/E of 31, even though it has only grown EPS an average of 10% annually over the past five years. Revenues are projected to go from double digit growth in 2011 to mid single digits in 2012. Net Income for FY2010 was also approximately the same as it was for FY2008.

Shutterfly (NASDAQ: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. It offers a range of personalized photo-based products and services for consumers to upload, edit, enhance, organize, find, share, create, print, and preserve their memories in digital photos. The company produces and sells photo books; greeting cards and stationery; personalized calendars; and photo-based merchandise, such as calendars, mugs, canvas prints, mouse pads, magnets, and puzzles.

Overview – Shutterfly sells at the very top of its historical valuation based on P/E, P/S, P/B and P/CF since its IPO in 2006. Insiders have sold over 60% of their shares over the previous six months and of the 25 transactions initiated in that time period, none have been “buys”. SFLY has a trailing P/E of an amazing 126. It has projected five year PEG of just under 4. Earnings for 2011 are actually expected to be under those achieved in 2010. Earnings projections for 2011 have come down drastically for 2011 in the last three months. Operating cash flow growth is problematic. In the last two fiscal years, Shutterfly grew earnings approximately 7 times faster than cash flow. One of the few positives I see with Shutterfly is a strong balance sheet with just over $6 in net cash per share.

I think all three stocks are vulnerable in any market pullback. For conservative investors, I would avoid these stocks until valuations better reflect their growth prospects. I will be looking to take some slightly out of the money bear call spreads on Shutterfly as well as Citrix and possible Estee Lauder.

Disclosure: I am long NFLX and I may also initiate short positions in CTXS and SFLY in the next 72 hours through out of the money bear market call spreads.