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If the market is indeed acting irrationally, then some companies definitely support the argument. Recently, we’ve noticed there are some companies trading at substantial premiums with poor profitability. While the market may seem emotional given its gyrations, numbers are far more objective when looking at a company relative to being overvalued or undervalued.

A low Price/Book Value ratio can indicate that a firm may be undervalued or that something is wrong with the company. Either way, it’s worth a closer look to get a better idea of the full story.

The net margin is a profitability margin that illustrates how much is retained in terms of profit relative to dollars earned. The higher the margin the better, and it should be checked against the industry average as well.

To start we screened for companies that had a high price multiple valuation (P/BV Ratio>5). From this narrowed pool we then screened for companies that had a low Net Profit Margins (X<5%). We did not screen out any sectors or industries.

1. US Airways Group Inc (LCC)

Sector

Industrials

Industry

Airlines

Market Cap

$968M

Beta

0.98

Analyst Sentiment

9/16 -List Buy/Outperform (Bullish)

The company operates a major network air carrier that includes America West, US Airways Holdings, PSA, MSC, Piedmont, and AAL. The firm’s Price/Book Value is 15.87. The firm’s Net Margin is 1.94%. The short interest for the firm is 20% as of 07/29/2011.

2. Sonic Corporation (SONC)

Sector

Consumer Cyclical

Industry

Restaurants

Market Cap

$593M

Beta

1.46

Analyst Sentiment

7/16 -List Hold/Neutral (Neutral)

The company operates and franchises drive-in restaurants across the US. The firm’s Price/Book Value is 15.7. The firm’s Net Margin is 2.11%. The short interest for the firm is 11% as of 07/29/2011.

3. Sify Technologies Limited (SIFY)

Sector

Communication Services

Industry

Telecom Services

Market Cap

$826M

Beta

3.57

Analyst Sentiment

9/16 -List Buy/Outperform (Bullish)

The company offers network, Internet, and electronic commerce services in India. The firm’s Price/Book Value is 9.7. The firm’s Net Margin is -6.79%. The short interest for the firm is N/A as of 07/29/2011.

4. Blue Nile, Inc. (NILE)

Sector

Consumer Cyclical

Industry

Luxury Goods

Market Cap

$495M

Beta

1.49

Analyst Sentiment

12/13 -List Hold/Neutral (Neutral)

The company is an online retailer of diamonds and jewelry. The firm’s Price/Book Value is 9.53. The firm’s Net Margin is 4.14%. The short interest for the firm is 55% as of 07/29/2011.

5. DineEquity Inc (DIN)

Sector

Consumer Cycl

Industry

Restaurants

Market Cap

$764M

Beta

2.78

Analyst Sentiment

4/4 -List Buy/Outperform (Bullish)

The company operates & franchises IHOP & Applebee's restaurants. The firm’s Price/Book Value is 9.2. The firm’s Net Margin is -1.85%. The short interest for the firm is 17% as of 07/29/2011.

6. Insulet Corporation (PODD)

Sector

Healthcare

Industry

Medical Instruments & Supplies

Market Cap

$836M

Beta

1.59

Analyst Sentiment

11/13 -List Buy/Outperform (Bullish)

The company develops and sells insulin system for diabetes. The firm’s Price/Book Value is 8.89. The firm’s Net Margin is -54.73%. The short interest for the firm is 21% as of 07/29/2011.

7. Auxilium Pharmaceuticals, Inc. (AUXL)

Sector

Healthcare

Industry

Drug Manufacturers - Specialty & Generic

Market Cap

$727M

Beta

0.88

Analyst Sentiment

7/16 -List Hold/Neutral (Neutral)

The company develops and sells variety of medical products. The firm’s Price/Book Value is 8.18. The firm’s Net Margin is -24.25%. The short interest for the firm is 22% as of 07/29/2011.

8. Deltek, Inc. (PROJ)

Sector

Technology

Industry

Software - Application

Market Cap

$418M

Beta

0.97

Analyst Sentiment

2/4 -List Sell/Underperform (Bearish)

The company offers enterprise application software and services related to project-focused firms. The firm’s Price/Book Value is 7.89. The firm’s Net Margin is -6.73%.The short interest for the firm is 4.9% as of 07/29/2011.

9. Lions Gate Entertainment Corporation (LGF)

Sector

Consumer Cyclical

Industry

Media - Diversified

Market Cap

$960M

Beta

0.62

Analyst Sentiment

4/8 -List Buy/Outperform (Bullish)

The company produces and distributes motion pictures, home entertainment, family entertainment, and more. The firm’s Price/Book Value is 6.79. The firm’s Net Margin is 1.5%. The short interest for the firm is 5% as of 07/29/2011.

10. Krispy Kreme Doughnut Inc (KKD)

Sector

Consumer Cycl

Industry

Restaurants

Market Cap

$542M

Beta

2.09

Analyst Sentiment

3/6 -List Hold/Neutral (Neutral)

The company sells doughnuts and related items through company-owned stores. The firm’s Price/Book Value is 6.28. The firm’s Net Margin is 3.29%.The short interest for the firm 5.7% as of 07/29/2011.

We hope this list helps investors as they do their own due diligence on companies that may be overvalued and operate with poor profitability margins.

Source: 10 Overvalued, Not-So-Profitable Stocks Vulnerable to Market Volatility