If you own a stock like Chipotle (CMG), you can correctly say that bears and shorts have been wrong on this stock for a long time. But that is just what Netflix (NFLX) longs used to say as well. Momentum stocks are like playing a game of musical chairs, it can fun and profitable for everyone who plays until the music stops, as it just recently did for Netflix longs. Greed kept many Netflix shareholders from selling their stock even though they were clearly offered extremely rich valuation levels to sell at, for a very long time.
This pattern looks to be similar in a number of stocks currently and yet longs still want more and more. The other problem I have with the stocks listed below is that they are not undiscovered stocks by any means, and at current valuation levels, investors would be foolish to think these stocks could continue to provide the same level of astounding gains going forward. It's important for investors to remember that darlings like Chipotle, and Amazon (AMZN), and others, won't always be the darlings of Wall Street. Just think about former darlings like Cisco (CSCO), Research in Motion (RIMM), Dell Computer (DELL), Microsoft (MSFT) and so many more. Netflix and other investors have learned in the past that valuation matters! Here are some stocks that could fall from very lofty levels:
Baidu (BIDU) shares are trading around $127.98. Baidu is a leading Internet search site in China. The 50-day moving average is $132.28 and the 200-day moving average is $132.47. Earnings estimates for BIDU are $2.91 per share in 2011, and $4.39 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 almost 50 times earnings, any disappointment on growth, a management error, accounting issues, or government policy issues could be tough for investors. The stock is trading below key support levels (the 50 and 200-day moving averages) and that could be a warning sign.
Chipotle Mexican Grill, Inc. (CMG) is trading around $334.18 per share. These shares have risen from a 52 week low of $204.60 and the 52 week high is $346.78. The 50-day moving average is $311.02 and the 200-day moving average is $284.07. The earnings estimates for 2011 are about $6.82 per share and $8.67 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. At over 40 times earnings, there is plenty of risk here. I don't believe the upside is commensurate for the risk. I think anyone not selling at least some CMG stock here is just plain greedy.
Peets Coffee & Tea, Inc. (PEET) shares are trading at $62.20. PEET is a coffee roaster and operates retail coffee shops. The shares have traded in a range between $37.34 to $64.57 in the past 52 weeks. The 50-day moving average is $56.34 and the 200-day moving average is $50.99. Earnings estimates for PEET are just $1.50 per share in 2011, so the PE ratio is over 40 now. How can you justify paying over 40 times earnings for this stock, especially in a market that has an average PE ratio of around 13?
Amazon.com, Inc. (AMZN) shares are trading at $227.15. Amazon is an Internet retailing giant based in Washington. The shares have traded in a range between $156.77 to $246.71 in the past 52 weeks. The 50-day moving average is $219.19 and the 200-day moving average is $197.19. Earnings estimates for AMZN are $1.95 per share in 2011, and $3.20 for 2012. This company continues to expand into areas that could lead to continued strong growth in the future. 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. Just as I am writing this, Amazon has released earnings and is dropping in after-hours trading. These are the kind of blow-ups that happen when valuations are too high.
Whole Foods Markets, Inc. (WFM) shares are trading at $70.22. WFM provides premium and organic foods in supermarkets nationwide. The shares have traded in a range between $39.07 to $74 in the past 52 weeks. The 50-day moving average is $66.18 and the 200-day moving average is $61.42. Earnings estimates for WFM are just $1.93 per share in 2011, and $2.26 for 2012, so the PE ratio is about 35. These shares appear ripe for a correction sooner or later at 35 times earnings.
Green Mountain Coffee Roasters, Inc. (GMCR) shares are trading at $64.75. GMCR provides specialty coffee products. The shares have traded in a range between $29.55 to $115.98 in the past 52 weeks. The 50-day moving average is $95.78 and the 200-day moving average is $75.02. Earnings estimates for GMCR are just $1.65 per share in 2011, and $2.62 for 2012. This stock has started to break-down and is trading below key support levels. The stock is now trading at about half of the 52 week high and could still fall further. This stock is quickly becoming another tough lesson for momentum investors.
LinkedIn Corporation (LNKD) shares are trading at $86.84. The shares have traded in a range between $60.14 to $122.70 in the past 52 weeks. The 50-day moving average is $81.50 and the 200-day moving average is not available since this company went public recently. Earnings estimates for LNKD are 12 cents per share in 2011, and 32 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. I won't be surprised if this just becomes another broken IPO stock.
Netflix, Inc. (NFLX) shares are trading around $77.37. Netflix is a leading Internet site for movie rentals. The 50-day moving average is $162.18 and the 200-day moving average is $219.68. Earnings estimates for NFLX are $4.44 per share in 2011 and $6.14 for 2012. However, earnings estimates could be reduced as many subscribers have canceled their service. The 52 week range is $74.25 to $304.79. Netflix is the poster child for what can happen when investor greed meets with the reality that valuation matters, management can make unforeseen mistakes, and business models change.
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.