3 Promising but Overpriced Stocks That May Drop Lower

Includes: GMCR, LULU, TZOO
by: Brian Nichols

There are many companies that have spent the last year posting large gains in stock. The following companies are now seeing those gains chipped away as the result of market panic. All three companies are still trading with yearly gains that exceed 100% but are in danger of seeing more losses.

The companies I am speaking of all have great futures. Each company continues to post quarters with increased revenue which shows an increase in demand. They all experienced a breakthrough year in 2010 which contributed to each company seeing these gains. The stocks have posted quarters in 2011 that exceed 2010 and each company is currently experiencing losses as a result of the market's downtrend.

There are 100s of companies that have seen substantial losses throughout the last two weeks. But these 3 companies have indicators which suggest the possibility for significantly more loss. For this to take place, a company must have traded much higher than earnings, because of speculation and a strong future. I find this aspect to be crucial because the psychology of our market has changed for the short term. Investors are not loading up on stocks that exceed value but rather selling stocks below value. The following companies have a strong future but may see more loss during the coming weeks.

Green Mountain Coffee Roasters (NASDAQ:GMCR) is trading down more than 12% since August 3rd. The company announced earnings of $0.49 per share, a gain of 140% year over year. The results showed a significant improvement and the company is expecting solid future earnings. The company is currently trading with a price to earnings ratio over 90.

Lululemon Athletica (NASDAQ:LULU) has seen losses over 13% since Tuesday August 2nd as a result of market sell-offs. The company has continued to release stellar earnings and shown great year over year performance. The stock trades with a price to earnings ratio over 55 as investors are excited about the company's future. The company's apparel is increasing in popularity, expanding throughout the country, and showing promise of expansion and growth.

Travelzoo (NASDAQ:TZOO) has lost over 40% since announcing earnings that missed high expectations. Even though the company failed to reach estimates, they still posted a significant increase in revenue and earnings year over year, which show tremendous growth. The company does not currently trade with a positive EPS, but is producing positive income. The company released earnings of $0.30 a share during the second quarter which is low in comparison to price. The stock is trading at $48.76 which is half of the company's 52 week high. The price is a result of strong expectations from analysts and investors. Travelzoo is producing additional revenue and earnings at a remarkable rate as the company expands into new territory.

Each company is loaded with potential, growth, and solid products. Investors have traded the stocks on potential and expectations rather than current performance. Price to earnings ratios reflect investor confidence in the future of a stock.

In this economy no one is considering the future of a stock but rather trading on market fear. The three companies have potential to see additional loss during the next couple weeks as the market may sell on downgrade news. Even with significant losses during a short period of time, these companies are trading high above earnings.

With overall confidence slipping away, these companies may endure investors that have forgotten about the potential. I believe each stock will rebound from this experience as all three are great companies. But in the short term, I expect heavy losses on behalf of each company as there is plenty of room for the companies to fall.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TZOO over the next 72 hours.