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The world is a global village

I do not know who the first to make the above statement was, but it is certainly a reality. In today’s world, the financial markets are deeply connected with each other. A retiree recently asked me about the future of Greece. To get a better view on Greece, I forwarded this question to a friend living there and working for the state. Apparently, Greece became a total economic disaster after the U.S.-sparked subprime crisis. (Interestingly, my friend believes that it is the Americans and Europeans who started the chaos in Greece). The Europeans' disagreement on the bailout and lack of motivation to do something has only made things worse for them. Things are also pretty messed up in Spain. Imagine an unemployment rate that is above 20%. Yes, unemployment rate in Spain reached 21.5%, recently. That number does not account for those who lost their hopes and left the job market.

Amid this gloomy macroeconomic atmosphere, most stocks took a heavy beating, experiencing significant losses. I think this atmosphere has created a cheap market which will bring huge returns to long-run investors. However, at the same time, we are also experiencing a bubble in several technology stocks. The evolution of Web 2.0 initiated a new bubble which looks like a techno-bubble version 2.0. Here is a list of 7 stocks that participated in this bubble. I believe these stocks do not provide a safe environment for our hard-earned money. If things keep getting worse in Europe, these high-fliers might loose their wings. They should be avoided until the dust in Europe settles. I have examined these stocks from a fundamental perspective, adding my O-Metrix Grading System, where applicable:

Stock Name

Ticker

O-Metrix Score

YTD Return

My Take

American Tower

(NYSE:AMT)

1.6

14.5%

Avoid

Amazon

(NASDAQ:AMZN)

1.18

0.70%

Avoid

Baidu

(NASDAQ:BIDU)

7.03

18.6%

Avoid

Salesforce.com

(NYSE:CRM)

0.05

-18.9%

Avoid

Groupon

(NASDAQ:GRPN)

N/A

-11.76%

Avoid

Linkedin.com

(NYSE:LNKD)

N/A

-30.14%

Avoid

RedHat

(NYSE:RHT)

1.64

4.36%

Avoid

American Tower Corporation (AMT) operates primarily in the communication, broadcasting and wireless infrastructure sectors. Headquartered in Boston, Massachusetts, the company also has operations in Brazil, Chile, Mexico, India and Peru.

The stock returned 14.5% in 2011, and it is trading at its 52-week high. With a low Beta of 0.59, it is moving in less correlation with the market. While the company is doing fine in growing its earnings, the market has over-priced the growth factor in AMT. The stock is trading with a trailing P/E ratio of 87 and forward P/E ratio of 42. It is also priced at 40 times the free cash flow and 10 times its sales revenue. Thus, even if we assume that all revenues turn into pure profits, it will take 10 years to recover your initial investment.

Amazon (AMZN) has been a long time high-flier, trading near three digit trailing P/E ratios for a while. However, the stock lost its mojo in the last quarter. Investors abandoned the Amazon’s ship, heading for safety. The stock, which was testing its resistance of $250 in October, rolled off the cliff, and lost 25% in the last quarter. Now, it is testing its support level of $180.

Amazon is a great innovation in the society. Its convenience allowed us to easily make online purchases through the Amazon.com website. It also provided a tax-free economy where thousands of retailers promote and sell their products online. However, Amazon might not be able to enjoy its tax-advantage over the traditional retailers in the near future. California legislators are already battling with Amazon regarding the online sales taxes. A national online sales tax might crush Amazon’s already low profit margin. Besides, the stock is expensive, at a trailing P/E ratio of 95, and P/FCF ratio of 53.77. I would not buy this stock until the dust settles. (Full analysis, here)

Baidu (BIDU) seems to be the safest among these dangerous stocks. In a recent article, when Baidu was trading at $148, I showed the readers that Baidu does not have much upside potential. The stock fell into the fair-value range after losing near 30% of its market cap. However, the fair value range of $171 - $177 is based on an extremely bullish EPS growth estimate of 46.3%. While Baidu reported an earnings growth of 80% in the last quarter, I still think that the stock is extremely risky. It is trading near 20 times its book value. Even Jim Cramer recently suggested staying away from stocks from the “Land of Mao”. Therefore, I am still bearish on Baidu, although the stock looks undervalued.

Salesforce.com (CRM) is a perfect example of the technology bubble. This stock is one of the hottest potatoes in the market. Surely, cloud computing has a great future. It is very likely that online data storage and management systems will replace the traditional local hardware-based systems. The San Francisco-based CRM is one the leading players in the cloud business. Their customer relationship management system is one of the best among its peers. However, the stock is extremely over-priced at a trailing P/E ratio of 5353. Even the forward P/E ratio of 66 sounds high. After losing near 19% in 2011, at a price of $106, CRM is trading at almost 5 times its dip price of $22 in 2009. Avoid this hot potato, if you do not want to burn your money.

Groupon (GRPN) launched its IPO at an elevated offering price of $20 per share, which was $3 higher than the initial price. Even at this price, the market players drove the stock almost 50% higher soon after IPO. Groupon closed its first day in the market at $26. Since then, the stock moved like a roller coaster, collapsing to $14 before bouncing back to $24.

Founded in 2008, Groupon made a quick move to get into the stock markets. Groupon’s CEO, Andrew Mason, started the company with the deal-of-the-day idea, where customers can get good deals on specifically targeted products. I do remember several similar companies that existed since the early days of internet, but somehow, Groupon was able to beat the competition. Nevertheless, it is a loss-making company that needs to employ thousands of employees to cooperate with the suppliers. This loss-maker is valued at a market cap of near $15 billion, although the book value is negative. Yes, Groupon, which trades for $23 as of Friday close, has a negative book value of -$0.02 per share. Right now, Groupon makes a loss of 50 cents on each dollar of revenue. I highly doubt that the company will ever be able to turn into profits. Even if we assume that all sales proceed into profits, it will take 12 years to recover your investment. Therefore, I rate it as a sell. The stock might even be a good short candidate when the right time arrives.

Linkedin (LNKD) is the type of company that we all like to be a part of, and most of us already are. The professional networking service provider connects employees with employers, and also with each other. However, the current business model does not generate much sales, it does not earn any significant profits either. Out of $436 million revenue, Linkedin generated a profit of $6.5 million. Still, better than the loss-makers, but it surely does not justify a valuation of $6.4 billion. The P/E ratios hover around four digit numbers, and the stock is trading near 155 times its free cash flow.

I think Linkedin has a great potential to be the world’s #1 source to match the employers with those looking for positions. However, that will require a significant change in Linkedin’s business model. Until the company makes some serious profits, it is in my avoid-for-now list.

Red Hat (RHT) is not a new company to the market. Established in 1993, it has a strong presence in the Linux-based consulting and software business. I think Red Hat is a great company, which is highly admired by software professionals and others alike. It is the closest competitor that can break the Microsoft monopoly. Do not get me wrong, I love the company. But after returning near 500% in the last 3 years, it looks expensive. The stock is trading at a trailing P/E ratio of 71, and forward P/E ratio of 41. Those are pretty high numbers. Surely, EPS is expected to grow at an annualized rate of 18%, but Apple is also expected to grow by 18% and it is trading at much more attractive ratios. Therefore, I rate Red Hat as a sell, until the stock falls into my fair-value range of $18 - $25.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 7 High-Flying Stocks To Avoid Until The Dust Settles In Europe