8 Severely Overvalued Stocks to Consider Shorting

by: Hedgephone

Investors never seem to learn from the past -- stocks are up with many names climbing significantly higher based mainly on blind faith in charts, revenue growth metrics, and electric Kool-Aid served by Wall Street and the corporate-controlled media. I don't know where all of the spending is supposed to come from because most of the actual consumers in the economy are tapped out or completely broke. Here are 8 stocks that are in a manic, speculative bubble. I expect all of these "high beta" names to massively underperform the equity markets if we sell off 10% in the S&P 500 (NYSEARCA:SPY).

CROX -- Crocs is back from the grave, after the stock dropped from $67 to a mere $1 during the last financial crisis. In my opinion, the markets are headed back to a bear market mode and the stocks that sold off on fundamentals last time will likely sell off on fundamentals again this time. CROX has shown investors strong earnings, but these numbers are juiced by tax loss carry-forwards, cyclical factors, and likely some degree of accounting shenanigans. Crox trades for 33X trailing earnings and 21X forward earnings, but keep in mind it doesn't pay much in the way of taxes and that once you buy a pair of its sandals, you don't need to buy another pair for quite some time. At an EV/EBITDA ratio of 18, a price-to-free-cash flow of 37X, and a price-to-book value of 7X, I view these shares as being worth closer to $1 than $67 -- if our nation's debt gets downgraded, look for these shares to collapse with the overall market.

AMZN -- Amazon "beat" earnings but guidance was terrible and it barely earns any money regardless of the low EPS hurdles set by Wall Street analysts. The company has proven it can grow sales but operating and gross margins shrink by the same percentage levels that the top line rises, which makes the growing sales a wash from a bottom-line perspective. Eventually, state governments will find a way to tax Amazon. At 100X earnings, these shares carry too much risk to make sense for long investors. If the overall markets crash because of a default, AMZN will not be left unscathed.

LNKD -- LinkedIn is another great company at a terrible price tag. The shares are trading at 1100 times earnings and an obscene multiple-to-book value and revenue. Yes, the company has substantial value in its web site, but with 15% of the visitors of Yahoo (YHOO) and 50% of Yahoo's market cap, these shares are priced beyond perfection. 1999 saw many stocks like this, which were popular web sites with little earnings and crazy valuations -- maybe this time is different, but likely this time is the same as the last time we had an internet bubble.

PEET -- Peet's Coffee & Tea makes a good brew, but the stock could leave a bitter taste in the mouths of equity investors. Peet's is trading for 40X earnings and 4.5X book value. With a GDP growing at 1% or so, the US is heading for a recession. Stocks should be trading for around 12X earnings and if PEET's valuation reverts to a 15X multiple, the shares could lose over 50% of their value.

QQQ -- The Nasdaq 100 is trading for over 23X earnings and technology spending is notoriously cyclical. Heading into a recession, most companies cut back on tech spending and investors tend to avoid the higher valuation, more speculative names in the market. Many of the QQQ stocks are trading at rich valuations, but investors may want to buy Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), and Microsoft (NASDAQ:MSFT) for "long hedges" against any short in this index due to the heavy weighting of these bellwether firms.

IWM -- The Russell 2000 has badly lagged the Nasdaq and especially the Nasdaq 100. The Russell is quite pricey here, and the growth rate projected by the analysts may not materialize if we head for a recession or slowdown in the US. Without QE, the Russell looks very vulnerable to a sell off toward the $60 level, which would represent a much more logical valuation level for the index fund.

HRBN -- Harbin Electric. The buyout offer from the chairman of this company is looking less and less realistic, given that no news has hit regarding his financing or the terms of the MBO. Personally, I am skeptical of most offers made by insiders on companies based on contingent MBO financing from banks. The reason behind the skepticism is that the chairman should have arranged the financing first and then simply made the firm offer if the deal was a real one and not just a fake bid to squeeze shorts.

ZAGG -- Zagg makes Iphone skins, but the company is concentrated at Best Buy (NYSE:BBY) and also with Apple. The business is trading at a large multiple to book value at over 5X and a PE ratio over 25X. Zagg faces a good deal of risk if the consumer slows down and shoppers hold on to their current cell phones without constantly upgrading.

Disclosure: I am short PEET, AMZN, LNKD, CROX, HRBN, ZAGG, IWM, QQQ via options generally with defined risk/reward ratios without unlimited risk.

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