3 Massively Overvalued Companies Which Could Be Great Shorts

Includes: SKX, TSLA, VEEV
by: Weighing Machine


Market cap of $3 billion.

Significant outperformance (1000 basis points) of the S&P 500 since Jan 1, 2013 (or from IPO date in case of Veeva).

P/E greater than 25x.

With relatively few cheap stocks on my radar, I have again turned to look for compelling short sale opportunities. While most investors appear to be bullish (as evidenced by the market hitting new highs recently), I see several pockets of overvaluation. Today I've decided to share 3 stocks which I believe to be significantly overvalued - my criteria include:

  1. Market cap of $3 billion
  2. Significant outperformance (1000 basis points) of the S&P 500 since Jan 1, 2013 (or from IPO date in case of Veeva)
  3. P/E greater than 25x

Tesla (NASDAQ:TSLA) shares have soared 90% thus far in 2014 (after rising 340% in 2013) as investors are not only betting on the continued success but are also betting on 1) incredible growth for the next 10 years and 2) flawless execution. With a fully diluted market capitalization of $38 billion, Tesla investors are assuming that the company is able to sell 100,000 Model S vehicles per year (at $100,000 per vehicle) as well as an additional 500,000 of its next generation mass market oriented vehicle (to be named Model 3 - assumed to cost $40,000) while earning operating margins of 15 and 10%, respectively. The Model S has proven to be incredibly successful, with a second-quarter run rate of nearly 32,000 deliveries. In order to earn enough profit to justify today's valuation, Tesla must triple the deliveries of the Model S (while earning a 15% operating margin on those sales) and sell 500,000 Model 3s. 500,000 units is a tremendous amount of cars to sell. Honda (NYSE:HMC) sells 600,000 Accords in a great year. It has taken Honda 45 years to develop its company to this stage. Similar for Toyota (NYSE:TM) and the Camry. Selling 500,000 units would mean that Tesla has created one of the most successful models of all time. Even if Tesla achieves all of this, the stock would have 0 upside, it would simply be fairly valued. To get a return, investors need Tesla to sell even more cars! Not only must it sell 20x the number of cars it is currently producing but it needs to earn the highest margins in the industry. Investors are completely ignoring the many, many things which can go wrong in the auto industry including: 1) quality problems, 2) supply chain problems, 3) safety issues, 4) competitive pressure on sales and margins. While Tesla seems to be a great company, at nearly 100x 2015 earnings, I think it is likely to be a terrible stock.

Veeva (NYSE:VEEV) shares soared over 25% following its second-quarter earnings release. While numbers easily surpassed lowball consensus estimates, Veeva investors face many challenges including: 1) growth will be more difficult to achieve looking into 2015-2016 as most large pharmaceutical companies have already adopted either Veeva or Salesforce.com (NYSE:CRM) CRM systems. The limited total addressable market has been well documented by SA contributor Suhail Capital and is likely to lead to meaningfully lower growth in 2015 than 2014. 2) Veeva does not control its own destiny - it is simply a Salesforce.com partner whereby it is allowed to customize and re-sell Salesforce.com's CRM systems to pharmaceutical companies rather than an owner of the technology and platform. This necessarily restricts Veeva's growth and margin potential as it can only operate within the narrowly defined market segment as defined by its agreement with Salesforce. Similarly, its margins are capped as Salesforce clearly has the upper hand in contract negotiations (again, because Veeva appears to have no alternative) and 3) ludicrous valuation - at its current price of $30.40, Veeva has a $4.6 billion market capitalization (14x 2014 expected sales and over 55x operating profit). At a more reasonable 12x 2015 operating profit, Veeva would sell for $10 per share, implying 67% downside.

Skechers (NYSE:SKX) shares have increased 87% thus far in 2014. Investors have bid up the shares to all-time highs on the back of strong sales of 'Relaxed Fit Memory Foam' sneakers as well as some other hit sneakers. Though Skechers shares are relatively cheap versus the other stocks mentioned in this article at 'just' 25x 2014 estimated earnings, a look at the company's history shows that earnings exhibit a great deal of cyclicality (fashion cycle, not economic cycle). For instance, in 2010, Skechers saw sales soar when it sold shoes which were advertised to tone the body just by wearing them. While sales were strong in 2010 (+40% vs. 2009), sales declined 20% in 2011 and margins plummeted due to negative operating leverage and markdowns. Similarly, the popularity of Skechers Memory Foam shoes has allowed it to increase pricing. However, after shopping around, it appears to me as if the price discount to Nike (NYSE:NKE) and Adidas (OTCQX:ADDYY) has narrowed to less than 10% (vs. 20-25% a few years ago). Given Adidas's weak recent results, we could see more price competition. Coupled with a downturn in the fashion cycle and a lower multiple, I wouldn't be surprised to see Skechers shares selling at $20-30 (10-12x $2-2.50 in EPS). With over 50% downside, Skechers looks to be a compelling short opportunity.

I believe the shares mentioned above will significantly underperform the S&P 500 over a 2-3 years time horizon.

Disclosure: The author is short SKX, TSLA, CRM, VEEV.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.