Netflix (NASDAQ:NFLX) was a fantastic stock to own for many years and it confounded shorts, many of whom lost large amounts of money as Netflix kept going higher. Some investors believed the stock would never stop rising because that was all it had done in the past. The shares hit a 52 week high of about $304.79 just a couple of months ago, and yet even though that put the price to earnings ratio at about 60 times, many investors still wanted more and expected that Netflix would keep on rising. In hindsight, over $300 per share was a great time to sell, even $250, and $200 is looking good now since the shares have recently plunged to about $155.
A number of factors came together and created a perfect storm for a massive plunge in this once high-flying stock. One of the issues was investor greed that pushed this stock so high that it was bound to collapse under its own weight. The other was related to greed, and that was a matter of investor expectations being way too high. It only takes one or two disappointments to send a high PE ratio stock back to earth quickly. The other factors that helped take the stock lower was a change in pricing plans for Netflix subscribers that was not well received by customers and because Starz ended the negotiations to renew licensing deals with Netflix.
At the end of the day, did it ever make sense to pay about 60 times earnings for a movie rental business? Absolutely not. Anyone who did was forgetting how quickly the movie business can change as it did for Blockbuster. Disruptive technologies, business models, management errors, and consumers can all quickly change the outlook for a company in a very short time, especially when technology is involved. Look at what Apple (NASDAQ:AAPL) has done to companies like Research In Motion (RIMM). Also, look at what paying too much for a good company does to investment results. Investors who bought Microsoft (NASDAQ:MSFT) or Cisco (NASDAQ:CSCO) when the PE multiples were 30, 40 or 50 times earnings lost buckets of money even though the core business models for these companies has remained intact.
Sooner or later richly valued, tremendously high PE ratio stocks come back to earth and investors in these types of stocks should consider taking at least some profits while everything is going great for these companies. The best time to sell is when the future looks bright - sometimes too bright, just as it did at the top of the market for internet stocks, real estate and many other assets.
It's also smart to remember that any company that trades for 40, 50, or 60 times earnings or more is going to eventually see some very smart people put a company together to compete for that highly valued business model. Many of the stocks below have seen very significant insider selling and that is another potential red flag. With all this in mind, here are a number of companies that sport very high PE ratios as well as having very high expectations from investors:
Netflix, Inc. (NFLX) shares are trading around $155. Netflix is a leading internet site for movie rentals. The 50-day moving average is $242.30 and the 200-day moving average is $228.51. Earnings estimates for NFLX are $4.67 per share in 2011. The 52 week range is $140.02 to $304.79. Near the lows of 2009, NFLX traded for about $20 and rose to over $300, providing exceptional returns to investors, yet for many that was not enough to sell the stock.
Baidu (NASDAQ:BIDU) shares are trading around $146.95. Baidu is a leading internet search site in China. The 50-day moving average is $145.12 and the 200-day moving average is $129.51. Earnings estimates for BIDU are $2.91 per share in 2011, and $4.40 for 2012. The 52 week range is $85.46 to $165.96. Near the lows of 2009, BIDU traded for about $10 and rose to about $165, providing exceptional returns to investors. With this stock trading at about 50 times earnings, any disappointment on growth, a management error, accounting issues, or government policy issues could be tough for investors.
BJ's Restaurants, Inc. (NASDAQ:BJRI) is trading near at $45.90. The 52 week range is $26.48 to $56.64. The 50-day moving average is $46.11 and the 200-day moving average is $42.36. The earnings estimates for 2011 are about $1.09 per share, and $1.33 for 2012. This puts the PE ratio at about 40 which is far too rich for a restaurant in my opinion. Insiders have been repeatedly selling shares. Consumers are fickle about food and restaurants and I don't believe it makes sense to pay 40+ times earnings.
Chipotle Mexican Grill, Inc. (NYSE:CMG) is trading around $318.06 per share. These shares have risen from a 52 week low of $164.26 and the 52 week high is $337.32. The 50-day moving average is $313.36 and the 200-day moving average is $272.27. The earnings estimates for 2011 are about $6.83 per share and $8.65 for 2012. This puts the PE ratio at well over 40 which is high for the restaurant sector. Insiders have been repeatedly selling shares and I can't blame them for cashing out while the getting is so good. Chipotle does have a strong brand, but at the end of the day the barriers to entry for a company to make burritos and other Mexican food is not high. Just as with Netflix any disappointments in growth could cost Chipotle investors a bundle. What could take a high flying restaurant stock down even if no competitor seems to be on the horizon? Anything is possible even if it's not likely, think about what happened to Jack in the Box many years ago when food safety issues sent the stock into a tailspin from levels that where nowhere near as lofty as Chipotle shares. At over 40 times earnings, there is plenty of risk here. Investors just aren't willing to recognize it yet.
Peets Coffee & Tea, Inc. (NASDAQ:PEET) shares are trading at $54.62. PEET is a coffee roaster and operates retail coffee shops. The shares have traded in a range between $33.20 to $63.99 in the past 52 weeks. The 50-day moving average is $57.73 and the 200-day moving average is $48.81. Earnings estimates for PEET are just $1.50 per share in 2011, so the PE ratio is about 40. You can see insiders selling here. I believe coffee stocks are in a bubble and sooner or later the investor fascination with this sector will cool off.
Caribou Coffee Company, Inc. (NASDAQ:CBOU) shares are trading at $14.81. CBOU is a coffee roaster and operates retail coffee shops. The shares have traded in a range between $8.50 to $14.49 in the past 52 weeks. The 50-day moving average is $14.17 and the 200-day moving average is $11.25. Earnings estimates for CBOU are just 41 cents per share in 2011, so the PE ratio is about 36. You can see insiders selling here.
Amazon.com, Inc. (NASDAQ:AMZN) shares are trading at $239.30. Amazon is a internet retailing giant and is based in Washington. The shares have traded in a range between $146.50 to $240.44 in the past 52 weeks. The 50-day moving average is $209.00 and the 200-day moving average is $190.51. Earnings estimates for AMZN are $1.97 per share in 2011, and $3.22 for 2012. Amazon is so much more than a place to buy retail goods. This company continues to expand into areas that could lead to continued strong growth in the future. The Kindle book reader has been extremely successful and Amazon is likely to continue with business and product innovations. This is a great company with incredibly smart management, but at about 120 times earnings, investors are probably paying too much for the potential growth.
Tesla Motors, Inc. (NASDAQ:TSLA) shares trade at $25.80 per share. This company offers the Roadster model and plans to offer a sedan called the "S" model. These shares traded as high as $36.42 in the past year. The 50-day moving average is $25.69 and the 200-day moving average is $26.26. TSLA is estimated to lose about $2.20 per share in 2011, and lose about $1.63 in 2012. Tesla shows innovation, but I do not believe there is enough interest in high-priced electric vehicles for this company to prosper.
Whole Foods Markets, Inc. (WFMI) shares are trading at $69.05. WFMI provides premium and organic foods in supermarkets nationwide. The shares have traded in a range between $34.04 to $69.24 in the past 52 weeks. The 50-day moving average is $62.96 and the 200-day moving average is $58.78. Earnings estimates for WFMI are just $1.92 per share in 2011, and $2.25 for 2012, so the PE ratio is about 35. These shares appear ripe for a correction sooner or later at 35 times earnings. I don't know of any other food retailer that trades at this type of valuation.
Green Mountain Coffee Roasters, Inc. (NASDAQ:GMCR) shares are trading at $107.99. GMCR provides specialty coffee products. The shares have traded in a range between $26.14 to $114 in the past 52 weeks. The 50-day moving average is $98.75 and the 200-day moving average is $67.27. Earnings estimates for GMCR are just $1.65 per share in 2011, and $2.61 for 2012, so the PE ratio is about 65. The higher the stock goes the more downside risk there is for investors. This stock has rocketed higher in the past couple of years and it has confounded the shorts. These shares appear ripe for a correction at about 65 times earnings.
LinkedIn Corporation (NYSE:LNKD) shares are trading at $87.65. The shares have traded in a range between $60.14 to $122.70 in the past 52 weeks. The 50-day moving average is $90.49 and the 200-day moving average is not available since this company went public recently. Earnings estimates for LNKD are 1 cents per share in 2011, and 38 cents for 2012, so the PE ratio is extremely high. This company needs to grow revenues and profits very significantly in order to justify the sky high valuations.
The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.