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My father taught me at an early age that life is a pendulum and everything eventually converts to a mean. The old adage “what comes up must come down” was one of his favorite sayings. With that in mind, here are three 2011 stock stars that I believe will have a much tougher 2012 and that I would avoid at these price levels.

Intuitive Surgical (ISRG) – “Intuitive Surgical, Inc. designs, manufactures, and markets da Vinci surgical systems for various surgical procedures, including urologic, gynecologic, cardiothoracic, general, and head and neck surgeries.” (Business description from Yahoo Finance)

Performance YTD*: 78.72%

Current Price: $461.62

Consensus Price Target: $450

*Compared with S&P

Key value observations on ISRG:

  • ISRG is selling at the top of its five-year valuation range base on price to sales and the stock has a five-year projected PEG of 1.85.
  • Insiders have sold over $30mm in shares over the last few months.
  • The stock has advanced over $100 a share in the last three months even though earnings estimates for FY2012 have only gone up 5% in that same time frame.
  • Year-end window dressing will be done by the end of this week taking this tailwind away from Intuitive Surgical’s stock. In addition, analysts’ project sales growth will be 20% less in FY2012 than it was in FY2011.

Chipotle Mexican Grill (CMG) – “Chipotle Mexican Grill, Inc. develops and operates fast-casual, fresh Mexican food restaurants in the United States. It also operates restaurants in Toronto, Canada and in London, the United Kingdom. As of October 20, 2011, it operated 1,100 restaurants.” (Business description from Yahoo Finance)

Performance YTD*: 60.98%

Current Price: $340

Consensus Price Target: $351

*Compared with S&P

Key value observations on CMG:

  • Insiders have sold more than $30mm in shares in the second half of 2011.
  • Earnings are increasing much faster than operating cash flow, which is a red flag.
  • The company is vulnerable to rising food prices as well as the costs of Obamacare as it gets implemented.
  • CMG is selling near the top of its five-year valuation range based on P/E, P/S, P/B and P/CF.

CommVault Systems (CVLT) – “CommVault Systems, Inc., together with its subsidiaries, provides data and information management software applications and related services primarily in North America, Europe, Australia, and Asia. The company develops, markets, and sells a suite of software applications and services under the Simpana brand.” (Business description from Yahoo Finance)

Performance YTD*: 50.90%

Current Price: $43.31

Consensus Price Target: $43.50

*Compared with S&P

Key value observations on CVLT:

  • The stock is selling at the top of its five-year valuation range based on P/S, P/E and P/CF.
  • CVLT is selling at forward PE of almost 40 and revenue growth is projected to slow down substantially in FY2012 from FY2011’s pace.
  • Insiders have sold over $10mm in shares in December.
  • The company is selling at much higher valuation than some of its peers such as EMC. It also has a projected PEG of over 2. It appears to have some “acquisition premium” built into its shares, which could dissipate if a suitor does not come forth.
Source: 3 Stock Stars Of 2011 That Should Be Avoided In 2012