3 Bubble Stocks Ready to Burst

Includes: ANF, CRM, GMCR
by: Danny Furman

From Goldman Sachs (NYSE:GS) in finance to Apple (NASDAQ:AAPL) in consumer discretionary goods, leading stocks have sold off hard in May and currently trade at significant discounts to 2011 highs. Without a fierce rebound in sector leaders, uber-rich bull market valuations on small and mid-cap growth stocks are unsustainable. Innovative restaurant reservations manager OpenTable (NASDAQ:OPEN) has lost 25% this month despite tremendous growth forecasts and monstrous margins. Priceline (PCLN) is down 10% over the same period. With trailing P/Es of 132 and 45, respectively, and growth forecasts dependent on continued worldwide fiscal stimulus, both still appear overvalued with immense downside.

While stocks that have already broken down offer momentum for short sellers, maximum gains on the short side are often made immediately after a stock peaks. Seeking Alpha contributor and fund manager Nicholas Southwick Levis makes the same assertion and discusses his favorite picks here. Another advantage to shorting a stock before it makes a big move south is that put options premiums are lower due to relatively lower volatility. My top three bubble stocks yet to burst are:

Salseforce (NYSE:CRM): Unlike Netflix (NASDAQ:NFLX), Salesforce is a favorite short play among fund managers I actually agree with. A trailing earnings ratio over 400 hardly seems justified with miniscule FCF, no dividend, market saturation, endless competition and growing cyberthreats for the information management provider. Insider selling has escalated since May 17 and insider holdings have progressively dwindled over several months. Currently over $151/share, CRM trades at an all-time high.

Abercrombie & Fitch (NYSE:ANF): Sorry to disappoint Animal House fans, but schoolboy uniforms and fraternity life are no longer the rage they once were. Without massive purchases in late 2010 by notorious bag holder Maverick Capital, managed by Lee Ainslie, the stock would doubtfully trade at 45x trailing earnings. FY 2011 is fully reported and sales were below 2008 and 2009 levels. The only real potential positive catalyst for the stock price is nostalgic fund managers Ainslie and Ray Dalio of Bridgewater taking the default dresser of frat boys private. Insider selling has been rampant for months, including multiple transactions in May, each netting board members over $400,000,000. ANF currently trades at over $74/share, up over 50% in 2011, and just off multi-year highs.

Green Mountain Coffee Roasters (NASDAQ:GMCR): It's hard for many people to understand stock market fraud, often because their morals disallow consideration of the types of actions commonly performed by market cheats. Sam Antar, Seeking Alpha contributor and former CFO of Crazy Eddie electronics retailer found guilty of immense financial fraud decades ago, certainly understands the thinking and execution behind stock scams large and small. I trust Mr. Antar as a man who knows he got away with "murder" and has committed much of the rest of his life to uncovering similarly despicable acts. His latest focus has been on Green Mountain Coffee Roasters' accounting practices and insider trading. With expansion into Starbucks (NASDAQ:SBUX) and otherwise impressive organic sales growth, GMCR is a highly valued stock with numerous potentially positive catalysts. According to Antar's research, however, which is easily confirmed, profitability is highly questionable due to inconsistencies in reporting. Despite strong projections, a trailing P/E over 100 is outrageous even without alleged fraud given uncertainty and a fragile economy. GMCR joins the NASDAQ 100 May 27th and buyers are pushing the stock to all-time highs day after day. Look for a dramatic reversal the first week of June.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PCLN, GMCR, CRM over the next 72 hours.