5 Overheating Stocks Ready For A Sharp Pullback

by: Investment Underground

In this volatile market, we have identified five stocks that are ready to witness a correction as they are trading at risky levels. Some of these stocks are already on the radar list of technical analysts expecting a fall. One can take advantage of the high price levels, though, consider this analysis as a starting, rather than ending point.

Ancestry.com, Inc (NASDAQ:ACOM):

Ancestry.com's stock price rose by 69.87% in the last year which is much higher than its peers and benchmark index. In the said period the benchmark index, S&P 500, advanced by 10.49% and Google Inc. (NASDAQ:GOOG), ACOM’s search competitor, rose by 13.23%. ACOM currently trades at a high P/E of 33.94 times at $34.11 levels which is much higher than the P/E of its competitor Google and the industry average at 19.21% and 16.67%, respectively.

The forward looking P/E also reflects the same pattern as ACOM trades at 22.15 times 2012 earnings; whereas, Google trades at 12.67 times. AMCO is also expensive in terms of price to book ratio, which stands at 4.46 at current levels. This is is much higher than the price to book ratio of Google, at 3.3.

Being the largest online family history resource, the stock offers strong fundamentals including growth in revenues, with better gross and operating margins as compared to its competitors and industry. But given the massive price appreciation in the last year, the stock is on radar of those expecting a pullback.

We believe that the stock may witness a sharp pullback and therefore recommend investor to follow a "sell on strength" strategy.

LM Ericsson Telephone Company (NASDAQ:ERIC):

LM Ericsson, providing communication equipment, and currently trades at $11.17. It offers a dividend yield of 2.3% and price/book value of 1.62. The stock has underperformed its benchmark index in the last year. The 52 week price change for ERIC was recorded at 7.51% whereas the S&P 500 increased by 10.49% in the same period. RENN stock is 20% less volatile than the stock market as its beta stands at 0.80.

Recently the company has announced that it is opening new global network operations center in China to capture the best possible opportunities. Analyst view on the stock after this development is mixed.

We believe that the stock will continue to under perform the market and therefore believe to short the stock at current levels.

Baidu, Inc. (NASDAQ:BIDU):

Despite of strong financial performance by Baidu we have identified it as a potential stock to witness corrections in the near future. The stock currently trades at a P/E ratio of 65.50 times at $144.29 levels which is high comparatively to its peers and Industry. The Industry average P/E ratio is 16.67 times. It is noticed that in last 52 weeks the stock price of BIDU has increased by 71.18%. The reason behind was the extra ordinary growth reported by the company.

As per the latest quarterly results, BIDU revenue grew by 78.4% year over year to $528.4 million with gross and operating margins standing at 80.51% and 52.18% respectively. The company expects its revenue to grow with the same pace that is by 75.1% to 79.5% in next quarter. In the said period, the stock moved in the range of $79.90 and $165.96. With earning per share of $2.2, BIDU trades at an abnormally high price/book value of 28.73.

Given its growth prospects many research houses including UBS and Deutsche Bank (NYSE:DB) have a buy call on the stock for long term investment but given sharp increase in the price of BIDU we believe that the technical correction is due. Therefore, we recommend our investors to follow a sell on strength strategy at current levels.

Renren Inc. American Depositary (NYSE:RENN):

Renren a social networking platform in China and currently trades 47% below its IPO price of $14. The stock has disappointed its investors with its meek performance in the secondary market. With an earning per share of negative $0.85, at current price of $7.34 the stock trades at a forward looking P/E of 180.25 times based on full year expectation for the period ended Dec 31, 2011.

Moreover, the company’s financial performance has also portrayed week performance where in trailing twelve months, profit margin has declined by 65.3%. The company proved to give bad results when compared to investors like Baidu. Going forward company expects better performance but it also believes that it is exposed to intensified competition. Therefore, Maxim Group initiated coverage on RENN recommending in august with a sell call with a target price of $7.5 on the back of increasing competition in China.

After touching the high level of $24.00 on May 4 the stock price of RENN made a low of $6.13 on June 24, 2011. The reason behind this sharp decline was the company’s lower than expected financial performance. Given RENN’s past performance and future outlook we believe that this stock is still overpriced and we will recommend our investors to sell RENN at current levels.

Sina Corporation (NASDAQ:SINA):

Sina, China’s renowned online media and mobile value added service provider, currently trades at $104.44. The stock has increased by 142.90% in the last 52 weeks which is 132.41% higher relative to S&P 500 increase in same period.

SINA touched one year high of $147.12 on April 19, 2011 since then the stock has witnessed correction. The main reason behind the fall was the subdued performance by SINA in terms of revenue growth and margins relative to its peers like NetEase.com, Inc. (NASDAQ:NTES) and Sohu.com Inc. (NASDAQ:SOHU). After its stock price declining by 29% from its high, at current levels multiple stock price indicators are still exhausting.

SINA trades at price to earnings to growth (five years expected) of 6.99 which is much higher than Industry average of 1.26 and its rivals NTES’ of 0.82 and SOHU 1.03 thus indicating that the stock is overpriced. Moreover, based on the most recent quarter numbers, SINA trades at a price/book value of 4.98 which is much higher than SOHU and NTES price/book Value of 3.39 and 3.74 respectively.

Given our case we believe that SINA is expensive at current levels. Therefore, we recommend investors to sell SINA at current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.