Barron's wades through ten very high-priced S&P 500 stocks, finding three that might be winners while the rest should be avoided.
Barron's looked at companies with P/E multiples based on 2010 estimates above 20, and removed sectors, like energy, facing a cyclical profit trough. It then determined value by looking at book value, free cash flow and the balance sheet. Here are the three stocks that were rated positively and the seven to avoid:
1) Whole Foods (WFMI): The gourmet grocer is a 'broken growth stock,' says one analyst, and shares look expensive considering Whole Foods' tough competition in a low-margin business.
2) American Tower (NYSE:AMT): A wireless and broadcast communications infrastructure company, American Tower is less attractive than some of its rivals. Bulls expect growth through international expansion but those prospects may already be padded into the share price.
3) T. Rowe Price (NASDAQ:TROW): The investment-management firm trades at a 90% premium to other asset managers' P/E ratios vs. a historical 20% premium. T. Rowe has a strong balance sheet but its operating margins are challenged.
4) Iron Mountain (NYSE:IRM): The dominant global player in record storage, Iron Mountain's multiple of 28 outstrips its projected 18% rise in profits. Revenue growth of 5% looks unimpressive once the economy improves, especially if the expansion is weighed down by debt.
5) Intuitive Surgical (NASDAQ:ISRG): The dominant player in robotic-surgery devices, Intuitive Surgical shares have fallen far from their peak but still look overly expensive. Hospitals will likely increase their orders as the economy recovers, but investors shouldn't pay 27 times next year's earnings for that.
6) Salesforce.com (NYSE:CRM): The company, which deals with customer relationship management, may find it difficult to continue boosting margins and free cash flow as it expands internationally and hires employees.
7) Juniper Networks (NYSE:JNPR): More than half the analysts covering this network infrastructure provider rate the stock as Hold. On average, they think the stock is worth $21, 19% below its current price.
8) Amazon.com (NASDAQ:AMZN): "Amazon may just be eternally expensive," writes Barron's, but it continues to perform. It beat earnings expectations last quarter, has significant free cash flow and analysts expect continued profit strength.
9) Broadcom (BRCM): The company, which supplies semiconductors for wired and wireless hardware manufacturers, could see increased earnings because of the popularity of smartphones and limited semiconductor inventories.
10) Expeditors International of Washington (NASDAQ:EXPD): The freight-logistics company should see another year of improved profits in 2010. It's debt-free, throwing off cash and the fact that it doesn't own fleets helps its cost structure during downturns.