As a bull market progresses and begins to show signs of stalling, it is important for investors to review their portfolios and essentially cut ties with riskier stocks or other assets. The reason being that riskier assets tend to fall more drastically when a breakdown occurs and tend to incur some deep losses when a recession hits. This is where the terms "risk on" and "risk off" come in handy to describe the investment environment. When stock markets are up, bonds are down, the dollar is up and commodities are up, consider the day risk on. The inverse results would qualify as a risk off day, in which bonds rally and gold rallies.
Unfortunately, valuations can get very out of whack during bull markets such as this one and this creates an even larger risk because once the market corrects itself and reenters reality, the valuation will drop to a more fair value zone. One such stock that I see as an overvalued risk over the long-term is Interactive Intelligence, Inc. (NASDAQ: ININ). Interactive Intelligence is a business services provider that specializes in contact center, unified communications, and business process automation services.
Turning to the fundamentals, Interactive Intelligence has a market cap of $1.08 Billion and is rated a 'strong buy' by analysts. Price to earnings is at 200 and forward price to earnings stand at 133.23. Price earnings growth is overvalued at 10, price to sales is overvalued at 3.33, price to book is very overvalued at 5.58, and price to cash is at 12. The company has no debt and cash per share of 4.32, giving the company a current ratio of 1.7.
Earnings are expected to fall 68.4 percent this year, rise 57 percent next year, and rise 20 percent over the next five years. The stock is beginning to accumulate short sellers, as the short float currently stands at 4.28 percent. Performance has been lousy as well; 1.82 percent year-to-date and -22.86 percent in the past year.
Interactive Intelligence had a monster run up to its March high of $80. However, the stock has lost 57 percent since hitting its high and valuation is still out of whack. Granted, the company's cloud-based system has had huge demand, as seen with a 67 percent compound annual growth rate between 2010 and 2013 for its "Communications as a Service" (Business Wire). While this is an extremely impressive achievement, it is time to come back to reality. When the economy shows uncertainty or even decline, businesses make major spending cuts and look for ways to bolster cash reserves. This phenomenon would drag on companies such as Interactive Intelligence and, due to its overvaluation, could face some big losses.
As always, be sure to do your own research before entering an investment.