Netflix (NFLX), the favorite toy of the Wall Street, has been an unstoppable, high momentum stock until recently. The stock made a remarkable run over the last two years. Since its dip around $20 in October 2008, investors pushed the stock all the way up to $300. That was an amazing return of 1500% over the last two years. While the company was doing fine, the bullish sentiment was extremely exaggerated, driving the P/E ratio to insanely high, three digit levels. I was bearish on Netflix when the stock was trading at prices above $250. The bulls were overwhelming the bears at that time.
However, recent events literally crushed Netflix, and the stock lost 52% in the last month. While it might be argued that the price hike by the Netflix management was the primary cause of the crash, in my opinion, that was just a catalyst. The stock was already trading well above its fair value range. Any stock that is trading with such high P/E ratios is a likely candidate for a crash. Here is a brief analysis of high fliers that could share the same fate with Netflix (Data from Finviz/Morningstar and is current as of September 30 close. You can download O-Metrix calculator, here):
Amazon.com (AMZN) is trading at $216 with a trailing P/E ratio of 95.26. The stock made a huge bull run over the last two years. Amazon returned more than 300% since its dip around $50 in December 2008. It is still in positive momentum mode, but I do not think that this upward momentum can last longer. Amazon.com is trading with a P/B ratio of 12.65, and P/FCF ratio of 54.35. Even though analysts estimate 26% EPS growth for the next five years, the stock has a high PEG ratio of 3.61, and a low O-Metrix score of 1.625. While Amazon.com has a gross margin of 22.45%, it's net profit margin is only 2.55%. The company greatly benefited from its "sales tax free" status in several U.S. States. However, Amazon.com's tax free status is creating an unfair competition with retailers that have a local presence. The State of California recently passed the Amazon.com tax law. Mercury News describes the summary of the bill as follows:
The Amazon legislation, Assembly Bill 155, requires the company to begin collecting online sales taxes beginning next September if the firm is unable to come up with a federal deal in which a uniform online sales tax policy is adopted by Congress by next July.
Given the states' desperate need for more tax revenues, it is very possible that Congress might adopt a uniform online sales tax policy. If that happens, Amazon's razor thin net profit margin might completely diminish. Jim Cramer is still bullish on Amazon.com, but due to the reasons above, Amazon.com could be a loser stock in 2012.
Baidu (BIDU) is trading at $107 with a trailing P/E ratio of 48.60. The stock made a huge bull run in the last two years. Investors who purchased Baidu shares at its dip of $18 in December 2008 gained almost 500%. Unlike Amazon, Baidu has already lost its positive momentum. While the year-to-date performance of 10.75% is in positive territory, the stock lost 27% in the last month. Its P/B ratio of 21.30 is well above my safety zone. Another red flag is the P/S ratio of 22.8. Thus, investors are valuing the stock at 20 times the sales revenues. The recent sell-off pulled the stock within the fair value range, but there is a high possibility that Baidu might be falling further. (Full analysis here)
Chipotle Mexican Grill (CMG), a Jim Cramer favorite, is trading at $303 with a trailing P/E ratio of 50.07. The stock made a huge bull run in the last two years. Investors who purchased Chipotle shares at its dip of $50 in December 2008 gained more than 500%. Similar to Amazon.com, Chipotle is still in upward momentum mode. The stock returned 73% in a year, and the year-to-date return is 43%. Its P/B ratio of 10 is well above the industry average. Even with an annualized EPS growth estimate of 23%, the stock has a PEG ratio of 2.17. Its O-Metrix score of 2.68 is also well below the market average. Earnings need to grow by more than 30% to justify Chipotle's valuation.
Salesforce.com (CRM) is trading at $115 with a trailing P/E ratio of 571.40. The stock made a huge bull run in the last two years. Investors who purchased Salesforce.com shares at its dip of $30 in December 2008 gained almost 300%. Recently, Salesforce.com broke its upward trend. The stock lost 24% in the last quarter, and it is trading 28.6% below its 52-week high. Almost every fundamental indicator is a red flag. P/FCF, P/B, P/C ratios are 285.6, 10.93, 26.78, respectively. Even with an annualized EPS growth estimate of 27%, CRM has a high PEG Ratio of 21.16, and low O-Metrix score of 0.45. This is one stock to avoid for sure.
Green Mountain Coffee Roasters (GMCR) is trading at $93 with a trailing P/E ratio of 91.12. The stock made a huge bull run in the last two years. Investors who purchased GMCR shares at its dip of $10 in December 2008 gained more than 800%. Recently, GMCR lost its momentum. Although it returned 182% since January, the stock lost 11% in the last month. It is trading 20% below its 52-week high. Almost every fundamental indicator is a red flag. P/B and P/C ratios are 7.83 and 186.87, respectively. Even with an annualized EPS growth estimate of 41%, GMCR has a high PEG Ratio of 2.21, and low O-Metrix score of 3.25.
Universal Display Corporation (PANL) did not report any profits, but it is trading at $48, with a forward P/E ratio of 52.68. The stock made a huge bull run in the last two years. Investors who purchased Universal Display shares at its dip of $8 in February 2009 gained more than 500%. The stock is highly volatile. It is bouncing between its 52-week range of $21.51 and $63.6. The closing price of $48 is 123% higher than its 52-week low. Analysts have a mean target price of $49, implying almost no upside potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.