Expensive Stocks Primed For A Pullback

by: Stock Traders Daily

In terms of the stock market's performance, we have reached the point where we are moving higher on good news, no news, and even bad news. Prior to last week, there was a belief that the housing market was picking up some momentum, which would become the next leg in the economic recovery, and become a forceful driver for the stock market. But, after a set of mainly disappointing housing data, in addition to poor results out of KB Home (NYSE:KBH), it seems fair to say that people got a bit ahead of themselves. However, the stock market brushed aside the bad news, and continues to charge higher.

Additionally, we have seen weaker-than-expected production activity numbers out of Europe and China, FedEX (NYSE:FDX) issued downside guidance for its Q4 citing slower than expected global growth and gas prices continue to escalate. Again, this had little bearing on the stock market, up to this point. There is one primary reason for this: Ben Bernanke and the markets' addiction to his QE policies. On Monday morning (3/26), the Fed Chairman essentially sounded the alarm bells on the economy, stating that the recent rise in job gains outpaces the actual growth in the economy. In other words, the job gains are more a function of fewer lay-offs, and perhaps, seasonal factors due to the record warm temperatures this past winter. Naturally, this was taken as a positive, because this keeps alive the notion that the Fed will continue its QE policies, and it puts to ease any fears that rates will go higher soon.

This divergence between the actual economy's strength and the stock market's continued gains has created a bubble. This is a discussion for another day, but it is of my belief that we are in the midst of the "Bernanke Bubble," which poses a great risk on a longer-term basis. From a near-term perspective, though, there are also plenty of reasons for concern. The first of which is the upcoming Q1 earnings season. Talk of potentially weak Q1 earnings has been increasing of late, due to slower growth in China, the worsening Eurozone and higher energy/commodity costs. Again, this has yet to translate into a pullback for the market as investors are still enamored with the latest QE fix. But, when that buzz fades, it is my belief that the market will be poised for a potentially sharp snap-back.

With this in mind, I wanted to scan for some stocks that were trading at exorbitantly high valuations, causing them to be especially prone for a sell-off. Here are a few to consider on the short side:

Valuation Too Healthy for ATHN

Shares of Athenahealth (NASDAQ:ATHN) have been on a tear since early this year, currently up 56% YTD, and nearing all-time highs. At the moment, the stock is testing the $78 level, and if it breaches that price area and closes at all-time highs, its run may continue, so caution is warranted. However, earlier this month, it was rejected on two occasions at the $78 area, and it subsequently slid lower before finding support at its 20-day moving average. From a valuation standpoint, it would be difficult to find a more expensive stock, which is primarily why we included it. It has a trailing P/E nearing 150x and a P/S north of 8x. Also, ATHN does have a history of issuing disappointing quarterly results. So, while it may be set up in the short-term for an extension - if it successfully breaks $78 - from an intermediate/longer term viewpoint, ATHN is a vastly overpriced stock that is due for a sell-off.

Secure Some Gains in QIHU

Qihoo 360 Tech (NYSE:QIHU) is a recent China-based Internet IPO that was pummeled like many others of its kind throughout much of 2011. This year, though, QIHU has rebounded impressively, making an unabated move higher since late February. The Internet and mobile security product provider is coming off a monster Q4, in which revenue and EPS were up 214% and 400%, respectively. Its growth has been impressive, but there are a few concerns that could weigh on the stock. First, QIHU is approaching a key resistance level at the $26 area. If it cannot successfully take out and close above that level, it could be prone for a set-back. Also, this is a stock trading with a trailing P/E of ~185x and a P/S of almost 18x. Needless to say, this is an extremely expensive stock. And finally, the fact that it's a China-based stock adds to its risk profile, due to the slowdown occurring there, as well as auditing and control concerns that pop up from time to time.

Tip of the Hat

Another tech stock that has enjoyed a sharp run higher this year is open source software provider Red Hat (NYSE:RHT). On Monday, it broke through to make new all-time highs, so shares could see some further momentum from there in the short-term. But, with RHT reporting earnings after the close on 3/28, there will be little room for error. With a P/E over 70x and a P/S over 9x, it is priced for perfection. Therefore, we wanted to put this name on your radar in the event RHT comes up short on Wednesday.

Log Out of LinkedIn?

LinkedIn (NYSE:LNKD), the social media platform for professionals, has also enjoyed a bit of a renaissance in 2012, after crumbling post-IPO in 2011. A major cause for its recent strength is that it is viewed as a play on the improving job market. LNKD also had a strong Q4, with revenue up 105% year-over-year. The bad news is, the stock is facing resistance in the $100-$105 level, and the stock is very expensive with a forward P/E over 90x and P/S of almost 20x. Therefore, if it cannot successfully push through $100-$105, it seems likely that profit-taking will set in and shorts may become attracted to the name again.

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