The markets have done extremely well so far in 2012, and that has pushed a number of stocks to extremely high levels. However, it seems that S&P earnings are forecast to be down or flat this quarter, if you take out Apple (AAPL). With stocks near highs, but earnings not, here are five stocks that could be potential short candidates purely on a valuation basis, based off of price-to-earnings ratios.
Amazon (AMZN): I know that I've argued in the past that Amazon's earnings don't matter, and that it is all about sales growth, but I'm beginning to change my mind. Last quarter, Amazon had a huge miss on sales, and guidance was terrible. The company forecast is for just a 7 cent profit this quarter, down from 44 cents in the year-ago period. With Amazon earnings for 2012 expected to be lower than 2011 numbers, Amazon is currently trading at 154 times this year's expected earnings. The stock has had a nice run lately, and is at levels not seen since November, even after Monday's decline following an analyst downgrade. Earnings will definitely matter for this company if it posts a loss for the first quarter. Depending on the size of the loss, the valuation could actually continue to rise, if earnings estimates drop more than the stock price does. Currently, the Amazon forecast is for about 1%, or even less, net margins this year. At some point it seems people will realize that the valuation on this name is just too high. Lately, that happens around earnings, and that could be the case again with this quarter's results.
Google (GOOG): This is a very interesting one to debate, as I've been very bearish on this name above $625 for the past few months. Last quarter, Google widely missed earnings expectations, and the stock took a hit. However, it has rebounded to pre-earnings levels, despite analysts taking down their estimates for this year and next by about $1.50 for each year. If Google misses again, people will realize that this wasn't a one-quarter issue, and they may start to seriously question the future of this name. I'm not saying this company is in trouble, but it might not be the darling many once said it was. There were tons of analysts saying this name could go to $800, perhaps $900, but let's get to $700 first. Oh, and let's get a decent earnings report. For this year, analysts expect 21.6% revenue growth but just 18.1% earnings per share growth. Google does trade at a decent 13 times next year's earnings, but over the past 2-3 years, the name has struggled above $625, and has seemed to top out around or slightly above $650. I'd be weary if we get too much of a run up into the earnings report.
Sina Corp (SINA): Despite Sina's recent fall from more than $80 to the current price of $63.66, it still is trading at more than 90 times this year's expected earnings, which makes it the most expensive of the big three Chinese internet names. This name is always open to government regulation risk, and it isn't even growing as fast as some of its peers. I really liked this name under $50 earlier this year, but the P/E at that point (based on this year's earnings expectations) was about 35. It is now over 90. That is just too much. Analysts have cut their earnings expectations in half for this name over the past three months, but the stock is up about 30%. That leads to a huge increase in valuation.
LinkedIn (LNKD): I know that some of the social media names carry huge valuations, but LinkedIn is trading at 163 times this year's earnings, and more than 90 times next year's earnings. Yes, this is a fast growing company, but I think the valuation on this one has gotten a little ahead of itself. LinkedIn has a $10 billion plus market cap, but doesn't even have a $1 billion year in revenue yet. Let's see a little more revenue and earnings before we give it such an extremely high valuation. Now, it is possible that this name gets even more expensive when Facebook goes public, but at some point the valuation needs to come down a bit. It is just too high for my liking.
Research in Motion (RIMM): This one makes my list because I don't believe in buying a name on pure buyout speculation. The company just reported a truly ugly number. Research in Motion used to trade for less than 4, sometimes even 3 times expected earnings, but now it trades for more than 7 times the current fiscal year's earnings. Analysts have just started cutting revenue and earnings expectations for this year (ending Feb. 2013), and the numbers for the following fiscal year are even worse. Don't forget, the company wouldn't even give guidance, but said it would be a tough year. It is getting killed right now by Apple and others, and a 7% rise after a terrible report makes this name too expensive. We could see more of a rise on takeover speculation, but I think it makes it even more of a short.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
