Attack of the 50 P/E Stocks!

For more tales of financial frights, our Halloween special series, Avoid These 8 Investing Horror Shows, won't disappoint!

You know what scares me? Not the fact that half the country will be dressed up as Snooki for Halloween this weekend (although there's a nightmare). What scares me is overconfidence and overvaluation. It's investors who forget about room for error. It's valuations that rely on certainty in a world where our foremost experts can't make predictions better than a goat. These things lead to inevitable disappointments.

So what better way to celebrate Halloween and the tragedy of overconfidence than by highlighting a few 50 P/E (or close to it) stocks? Here are four:

Company

Forward P/E

YTD Return

Scary character it reminds me of ...

Amazon (Nasdaq: AMZN  )

56.4

27%

Girl from Exorcist. Everyone loves her. Looks like she can do no wrong. Until she tries to kill you.  
Netflix (Nasdaq: NFLX  )

49

225%

The Ring. Mesmerizing videos setting up an unexpected catastrophe.
Wynn Resorts (Nasdaq: WYNN  )

57.6

81%

Clown from It. Pretends he's your friend. Brings fun games. Good chance he'll disembowel you.   
Sirius XM (Nasdaq: SIRI  )

46

130%

Crazy uncle Leo from Seinfeld. Yells a lot. Just feel bad for him.

Source: Capital IQ, a division of Standard & Poor's.                                     

Amazon
I read a lot, and couldn't imagine life without Amazon. I bought a few books from my local Barnes & Noble the other day, and as I walked out, I just thought, "Well, that was stupid." They cost twice as much as they would from Amazon. I'm a huge fan of this company. And I realize it isn't just books anymore; Amazon has done a spectacular job plowing into territory once dominated by eBay (Nasdaq: EBAY  ) . I'm bullish on Amazon's future. Big time.

But with a forward P/E well over 50, the company's stock makes me want to gag. Yes, Amazon's moat justifies a premium multiple. But a 50 P/E isn't just a premium multiple. It's a recipe for impending disappointment. Really great companies can blow the doors off earnings while leaving investors behind when shares are bought at sky-high valuations. It's happened before. It'll happen again.

Netflix
I have similar feelings about Netflix. This is a phenomenal company whose future I'm really confident about. I'm one of the many who have said sayonara to cable and now rely almost entirely on Netflix and Hulu for TV entertainment. And I have little doubt that many others will make that shift. Netflix's future is bright.

But there comes a point where a company's success disconnects from its share price. With a P/E ratio approaching 50 and a 225% surge this year alone, I can't help but think Netflix is getting close to that danger zone. Here's what this looks like graphically:

Source: Capital IQ, a division of Standard & Poor's.

More than half of Netflix's return this year is the result of multiple expansion, not earnings growth. That's a dangerous form of return. Netflix is expected to grow 28% per year over the next five years. Does that justify a high multiple? You bet. But a 49 P/E? Sure would make me uncomfortable.

Wynn Resorts
The U.S. consumer isn't dead. Real consumer spending is actually at an all-time high. And thankfully for companies like Wynn Resorts, gamblers in Macau can't empty their wallets fast enough. Wynn has been a remarkable turnaround story from the depths of 2009, sending shares up sevenfold.

But that last fold may have been one too many. Have a look at earnings estimates over the next few years:

Year

2011

2012

2013

2014

EPS Estimate

$2.16

$2.75

$3.86

$4.41

Source: Capital IQ, a division of Standard & Poor's.

Say this all goes down as planned, and Wynn earns $4.40 per share in 2014. Now say the company's multiple falls to a far more reasonable -- but still extremely generous -- 30 times earnings. That would put shares at about $132 per share. From today's price of $105, that's a grand return of less than 6% annually. Tweak those assumptions as you wish. It's hard to get excited about a cyclical stock trading with a dot-com bubble multiple.

Sirius XM
I feel I have to join the witness protection program anytime I write critically about Sirius XM. Shareholders are fanatics, and they get fired up when challenged that their Sirius shares aren't rivaling the dollar as the world's next reserve currency.

But I'll take the risk. Here's how I view it: Sirius skirted bankruptcy last year, which is great -- because it came damn close. Then it slashed costs like no one's business -- which is also great, because your average lemonade stand had been more profitable. What's left is a viable company. But what's it worth? That's the issue at hand. Shares trade at 46 times 2011 projected earnings, and 20 times 2012's projected earnings. No thank you. Some counter that Sirius is a cash-flow story. Fine. The company generated $148 million in free cash flow over the past 12 months, which equals a 2.7% yield over its $5.4 billion market cap. Perfectly uninspiring. 

Disagree? I'll go out on a limb and say some of you do. Fire back in the comment section below.

Looking for additional scary stories? We've got what you need in our Halloween special series, Avoid These 8 Investing Horror Shows.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Amazon.com, eBay, and Netflix are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on eBay. Try any of our Foolish newsletter services free for 30 days

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (32) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2010, at 12:17 PM, LDSGJA wrote:

    Great writing: " Then it slashed costs like no one's business -- which is also great, because your average lemonade stand had been more profitable."

    Anyone think $CSTR ought to be added to the list considering today's increase?

  • Report this Comment On October 29, 2010, at 12:27 PM, joshpritchard wrote:

    @jdrumstik -- even with the surge today, CSTR's forward P/E is still less than 25. Not saying it has a low multiple per se, but definitely no where near the others on this list

  • Report this Comment On October 29, 2010, at 1:03 PM, ItAintCool wrote:

    Not everybody has to like SIRI, Morgan. But most analysts do. Almost every analyst has given it a $1.50 - $1.60 target price, even those who are more skeptical. Why do you think that is?

    1) It is a virtual monopoly.

    2) Satellite Radio is now standard factory installed in almost all cars sold in the US. And 50% of those who get the radios in their car keep paying for their subscriptions.

    3) Churn is at a all-time low.

    4) Their Debt Load has been reduced and continues to go down.

    5) Their Credit Rating has been continually upgraded several times over the last two years

    6) Their subscriber rate has continued to increase despite a soft economy. In fact, they are now 2nd in the most subscribers to a paid media content provider, 1st being Direct TV.

    7) They have quite a lot of tax write-offs in their pocket to use as their earnings continue to increase, even generation more profit.

    8) Yes, you're correct. It did turn around from a near-bankruptcy (as did other companies 2 years ago). But it didn't go bankrupt, because the company has a good product and the fundamentals of the company are strong. It didn't need a government bail-out to save itself unlike other companies. Liberty Media saw that fundamentals of the company are strong and made a killing. Many other small investors saw that as well and bought it at the all-time lows and they made a killing. While you and other MF's decided to attack the stock for the last 2 years, many of us made stratospheric returns. And we continue to do so even as you wrote this article.

    Morgan, Have you picked a 30 bagger in the last 2 years? OK, how about a stock with a 60% gain made in the last 2 months? If you had told your fellow readers to buy SIRI over the last 2 years instead of putting it down. You would have been the "Hero" of the small investor. But instead, you can just keep your title of "Fool".

    Of course SRI investors are fanatics. They're entitled to be. The stock has been very good to us over the last 2 years. I don't need to "attack" you for your criticism, the fundamentals do a better job than I could. I just laugh at you every day, as the stock continue to go up to new yearly highs. And yes, I've taken profits from my initial SIRI investment, so now I'm just playing with the house's money.

  • Report this Comment On October 29, 2010, at 1:07 PM, topbeancounter wrote:

    Let's be "clear" here. Clear Channel attempted to drive them into bk to clear the roadway for them to rule the world. Their pack of distortions and outright lies, assisted by a couple of FCC sheep, delayed the merger until almost all the money was gone. THAT WAS THE PLAN. Fortunately, Clear Channel was not successful and they will not be successful in the future since capitalism is still alive and well in this country. Now it's Clear Channel I watch under pressure. Their ad revenues they can blame on anyone or anything they want, but the line up at Sirius is really tough to beat even before the merger. Now it's impossible. I can wait around a couple of years for Mel to continue to work his magic.

  • Report this Comment On October 29, 2010, at 1:32 PM, shuze57 wrote:

    to all the bug-eyed shorties:

    it hurts, doesn't it.

  • Report this Comment On October 29, 2010, at 1:37 PM, lazytype wrote:

    Any fool can distinguish great company from a mediocre thats why growth stocks cost more.

    It makes the stock picking hard to balance that. Didn't you know that?

    What is the point exactly?

  • Report this Comment On October 29, 2010, at 1:38 PM, ItAintCool wrote:

    Hi Folks,

    Here's a preview of Marek Fuch's "What Went Wrong" Video coming soon to an internet near you.

    Hi! My name is Marek Fuchs! On Thursday, I told you to short sell Siri in my "Against the Grain" video, when it was at new highs of 1.43-1.44, saying it was at the end of a "Short Squeeze". Today the stock at at new yearly highs of $1.50.

    WHY DIDN'T YOU LISTEN TO ME! MY NAKED SHORT SELLING BUDDIES NEEDED TO COVER THEIR LOSSES AT YOUR EXPENSE! WAAAAAAAAHHH! NOW I WON'T BE INVITED TO THEIR FANCY DINNER PARTIES!

    It's not my fault! It's not my fault!! It's not my fault!!!!

    Watch my video soon where I say that "it's not my fault" that I told you to short-sell SIRI while it continues to go to new yearly highs. I'm sure I can come up with an insane excuse why it's not my fault that I told you to short-sell SIRI when it's skyrocketing to new highs. Here's one: SIRIUS investors are a bunch of DOODY HEADS! I HATE YOU! I HATE YOU!

    SIRIUS is a STUPID STOCK! STUPID, STUPID, STUPID! It should do what I say, not what the fundamentals say!

  • Report this Comment On October 29, 2010, at 2:08 PM, doubting wrote:

    Morgan,

    I do disagree with your analysis wholeheartedly because it is very very short-sighted and simply shallow. You are basically using zero actual references and zero facts. What does your "projected" mean? Who projected? ... Analysists!!! Give me a break!!! Why don't you look at a minimum at siri management's projections that are always low balled. Why don't you look at siri's capex that is going to be negligible starting 2012? Why don't you account for siri's interest expense going down dramatically and singinificant debt pay off in the next 18 months. Why don't you consider next year's price freeze expiration? Why don't you account for the fact that in awful consumer economy sirius xm will add between 1.3M and 1.5M new customers in 2010. Why don't you analyze their further merger synergies from savings on talent and programming to business optimization? Why not consider their outright dominance on the radio market? Why don't you look at their phenomenal product and ask yourself who else can provide that. Why don't you do your due diligence and then write something that will demonstrate your konwledge versus your ignorance? If I were you I would ask myself why would they read and respect what I am writing when I am taking them for a ride. The combination of siri's business and its hardly untapped potential allows to value their business at least at $20B TODAY. In five years this will be a $60B to $80B business. You cannot even compare sirius to dtv, dish or comcast because THEY are competing with each other while playing on the same field whereas sirius has no real competition. Sirius xm has positioned itself uniquely at a great start up cost and sacrifice but now is the time of real harvesting of their fruits. In this respect they are easily compared with amzon.com, e-bay, and Apple. If you do not understand the obvious, at least do your homework and pay attention to guys like Tuna Amobi and a few other folks who have consistently seen siri as a great business with a huge potential since the time of its merger with xm.

  • Report this Comment On October 29, 2010, at 2:11 PM, TMFHousel wrote:

    Never disappointed.

    -Morgan

  • Report this Comment On October 29, 2010, at 2:15 PM, penboy wrote:

    I've lost a ton of money on SIRI and I've been crying everyday when the stock price sinks faster than the stone.

  • Report this Comment On October 29, 2010, at 2:35 PM, TMFAgewone wrote:

    "Not the fact that half the country will be dressed up as Snooki for Halloween this weekend (although there's a nightmare)."

    I feel compelled to correct you, Morgan. It wouldn't be a nightmare, as you describe. It'd actually be a situation.

    Respectfully,

    Mike

  • Report this Comment On October 29, 2010, at 2:39 PM, TMFHousel wrote:

    And Michael wins!

  • Report this Comment On October 29, 2010, at 2:46 PM, CPACAPitalist wrote:

    Good article Morgan - enjoyable to read as it was on point. I don't understand the individuals who feels the need to rant and rave in the comments section - if you disparage TMF and its contributors so much, why spend your valuable(?) time reading articles just so you can turn around and bash? Just because the subject matter of an article is fundamental, and the opinion of the author doesn't align with your own, doesn't mean its wrong, or bad, or whatever.

    Anywho, Happy Halloween - these crazy commenters scare me more than a drunk mummy at the company party...

  • Report this Comment On October 29, 2010, at 2:51 PM, CPACAPitalist wrote:

    Fool GTL:

    Get on TMF website.

    Take a look at the newest articles

    Leave angry comment

    Repeat

  • Report this Comment On October 29, 2010, at 2:53 PM, ItAintCool wrote:

    "Never disappointed".

    -Morgan

    Maybe instead of you adding snide remarks to the peanut gallery, you can try to answer some of the points that I and some of the other posters, like Doubting, have addressed.

    Yes, I too made some sarcastic remarks. Not at your expense, but at Marek Fuch's, who just cost his followers a lot of money. But what I and Doubting have said to you were salient points that you completely ignored to address and instead threw a snide remark at the all comments as a whole, who read and replied to your article.

    How can you invite reasonable discussion, when you can't even support it yourself?

    So, does this mean anybody who makes a reasonable counter-point to your article is also part of the angry mob?

  • Report this Comment On October 29, 2010, at 2:59 PM, CPACAPitalist wrote:

    @ItAintCool: are you really going to try and say the way you phrase your critisms lends itself to a "reasonable counter-point" type discussion? Your comments include both the terms "DOODY HEADS" and "I HATE YOU"...

  • Report this Comment On October 29, 2010, at 3:00 PM, Austin77478 wrote:

    @ CPACAPitalist: "I don't understand the individuals who feels the need to rant and rave in the comments section -" Please, check your subject and verb agreement. "Anywho" What's that?

  • Report this Comment On October 29, 2010, at 3:01 PM, ItAintCool wrote:

    penboy wrote:

    I've lost a ton of money on SIRI and I've been crying everyday when the stock price sinks faster than the stone.

    I guess you must live on "The Bizzaro World", where everything is opposite of what is happening in the real world.

    Happy Halloween

  • Report this Comment On October 29, 2010, at 3:03 PM, CPACAPitalist wrote:

    Anywho is a term borrowed from the Simpsons - I use it occasionally in moments of levity... d'oh.

  • Report this Comment On October 29, 2010, at 3:09 PM, ItAintCool wrote:

    CPACAPitalist,

    You obviously didn't read my first post, which was the one directed at Morgan, with Salient points. The second post which you excerpted was, as I admitted, a sarcastic take on Marek Fuch's and his "Against The Grain" video. Mr. Fuch's continues to rail against Sirius, despite the fact that he was seriously wrong. He told people to short sell during a short squeeze and got burned. The problem I have with Mr. Fuch's is he never owns up to his bad calls and always finds excuses to defend them. He also doesn't allow people to post comments about his videos. The last time he told people to short SIRI and it went up, he blamed his bad call on the good news on increased subscriber growth. Except, that news was given out days before he even told people short the stock. So that's I why I made fun of him. I did not attack Morgan. I gave him 8 points why the stock has gone up and is valued correctly. He didn't address them.

  • Report this Comment On October 29, 2010, at 4:43 PM, CPACAPitalist wrote:

    Never dissapointed.

    -CPACAPitalist

  • Report this Comment On October 29, 2010, at 9:21 PM, MichaelHamilton wrote:

    I totally agree, I wouldn't buy any stock with a pe over 30

  • Report this Comment On October 30, 2010, at 1:07 PM, midnightmoney wrote:

    At 41, I have an age to earnings ratio of 112.

    My ttm average from behind the three point line is a fifth of that at best.

    PLTBLTSS (Pool lengths to breaks longer than sixty seconds): 18.5.

    Quarterly burnings are due.

    I'm %100 insider owned

    with a short squeeze who goes by the name Katarzyna.

    As for my point, it's to Morgan, and it's that provoking and inciting is one of the best things writing can do.

  • Report this Comment On October 30, 2010, at 1:15 PM, FoolishErik wrote:

    There is a difference between owning a stock with a lofty P/E and buying a stock with lofty P/E. I am delighted with NFLX's lofty P/E because I bought it at a low P/E. My downside risk, therfore, is very small. I sleep peacefully. If I needed cash today I would go to the bank with a smile. Buying NFLX at today's P/E would have a much larger downside risk and I would not sleep as well; so I don't buy at these prices.

    As I don't need the cash today I am not selling my NFLX. I believe in the company's longterm prospects, and I also believe myself incapable of timing the market (it's simply too irrational in the short term). I would not sleep peacefully were I to try timing the market.

    So I hang on for the fun ride; I pay attention to the company's prospects and P/E; and I will buy again if the irrational market presents me with another low downside-risk entry point.

  • Report this Comment On October 31, 2010, at 3:26 AM, Streetlife373 wrote:

    I agree with your general assessment that all four of those companies are now in serious overbought territory. I also agree with you that all four of them are great companies with bright futures. Why is it that so many posters can't seperate a great company with an overbought sticker? You love the company, so you have to buy it at any price? Sounds like a recipe for disaster to me.

    They are not mutually exclusive people. NFLX may well be the best stock of our generation. That doesn't mean it's not crazy overbought right now.

    The whole concept of FORWARD P/E is often times lost on people. They always say, "yeah but it's a growth company..." I know, but again, FORWARD P/E takes that growth into account already.

    I'm not saying those companies won't continue to go up if the broad markets continue to march higher. I'm just saying, I wouldn't want to be holding those companies when a pullback does come. If the markets pullback 5-7% here soon which seems more likely then not, it's a good bet that those "growth story" companies will see twice that movement or more to the downside.

    I would advise anybody who is currently in those stocks to give up the short term potential 5% further upside, and take your profits while you can. If you truly love those companies like NFLX, I guarantee you will be able to get back in at 150$ in a few months.

    Good luck

  • Report this Comment On October 31, 2010, at 3:22 PM, MichaelHamilton wrote:

    Take a look at the p/e of open table and laugh.

  • Report this Comment On October 31, 2010, at 10:59 PM, mbawharton wrote:

    High risk comes with high return. These overvalued stocks can jump 100% in a year, or it can drop 50% in the same time frame. The question is whether you can stomach the potential risk while chasing the upside.

  • Report this Comment On November 01, 2010, at 11:58 PM, veryst wrote:

    I am little confuse. What grow 225% in nflx ?

  • Report this Comment On November 02, 2010, at 2:09 PM, penboy wrote:

    SIRI was a great distress play, but it is over folks. The year ahead has nothing in store for SIRI other than a struggling company.

  • Report this Comment On November 02, 2010, at 7:59 PM, veryst wrote:

    what does it mean ytd return 225%, but materially?

  • Report this Comment On November 06, 2010, at 12:18 AM, Isaac86 wrote:

    @ ItAintCool

    He admitted today that it was a very bad call.

    See the video yourself.

    http://www.thestreet.com/_yahoo/video/10913251/sirius-what-w...

  • Report this Comment On November 12, 2010, at 6:05 AM, thidmark wrote:

    Like moths to a flame ...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1350379, ~/Articles/ArticleHandler.aspx, 10/25/2014 3:30:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement