5 Stocks You Can Sell Right Now

In April of last year I decided that the boundaries of financial metrics no longer mattered to me, and I embarked on creating my own unique index, dubbed the TMFULOI, to examine and help me determine what the most overvalued companies in the market were.

Far from an exact science, the TMFULOI takes into account a company's book value, price-to-sales, and price-to-cash flow ratio, allowing me to compare companies based on set parameters, which you can read more about here. Through the first two rounds of utilizing my index I was able to handily beat the S&P 500, my benchmark index, with the cumulative five stocks underperforming the S&P 500.

In my most recent instance using the TMFULOI, I added a growth discount parameter suggested by my Foolish colleague Rick Munarriz, who correctly pointed out that the initial TMFULOI valuation model I was using failed to account for, and even punished, rapidly growing companies. Having completed a third round using my newly adjusted TMFULOI value, I'm happy to say I have yet again surpassed the S&P 500 and am now a perfect three-for-three, despite LinkedIn (NYSE: LNKD  ) being a thorn in my side once again!

Company

Performance Since Feb. 19, 2013

Performance Relative to S&P 500

ARM Holdings

(16.4%)

(21.9%)

LinkedIn

13.9%

8.4%

Aspen Technologies

(4.4%)

(9.9%)

SolarWinds

(27.6%)

(33.1%)

MercadoLibre

27.9%

22.4%

Source: Yahoo! Finance.

All told, this grouping of the five most overvalued companies according to my valuation metric underperformed the S&P 500 by an average of 6.8%!

Now, it's time for a new round of the market's most overvalued companies. It's been said that once is luck but three is a trend, so let's see if I can make this four in a row for my adjusted valuation metric!

Company

Price/ Book

Price/ Sales

Price/ Cash Flow

TMFULOI

Forward Sales Growth %

Adjusted TMFULOI

Regeneron 
Pharmaceuticals 
(NASDAQ: REGN  )

16

16.8

270.3

303.1

27.1%

11.18

Qihoo 360 
Technology
(NYSE: QIHU  )

11.5

15.7

90.9

118.1

40.7%

2.90

Yandex
(NASDAQ: YNDX  )

27.7

10

25

62.7

23.6%

2.66

LinkedIn

20.4

18.8

67.6

106.8

41%

2.60

TripAdvisor
(NASDAQ: TRIP  )

10.9

10.8

34.6

56.3

22.3%

2.52

MercadoLibre

15.9

12.2

31.6

59.7

25%

2.39

Sources: Morningstar, Yahoo! Finance, Motley Fool CAPS Screener, author's calculations.

Regeneron Pharmaceuticals
Normally I exclude biotechnology companies from these rankings because they often skew the index, but Regeneron has been healthily profitable for some time now. Even though I made the company's lead drug, Eylea (which treats wet age-related macular degeneration), my primary selection if I were to build a biotech dream team, the valuation here is getting out of hand according to my TMFULOI. The real concern would be Regeneron's free cash flow, which is being directed, almost in its entirety, at additional research and development. With a growth rate of 27.1% in 2014, Regeneron's forward P/E of 38 isn't too horrific, but it'll need Eylea sales to pretty much knock Wall Street off its feet in each and every quarter if it hopes to maintain this lofty valuation.

Qihoo 360 Technology
As you'll see with many of the companies on this list, few are having any issues with rapid growth. Qihoo, a China-based Web and mobile browsing company, delivered a 59% increase in revenue in the first quarter. Furthermore, Qihoo's product penetration rate and browser penetration rate stood at 95.8% and 69.6%, respectively. While investors see this as a sign of Internet security dominance, I see it as a sign that little growth potential remains. The downside of big market penetration is that slower growth is likely around the corner, and it tends to attract the attention of bigger companies that want a piece of the action. Add that to the political unpredictability of China and Qihoo's 91 times cash flow, and I have all the reasons I need to keep my distance.

Yandex
Overseas search engines seem to be a popular theme here, with Russia's largest search engine, Yandex, coming in with the third-highest adjusted TMFULOI score. Like Qihoo, its growth has been impressive, with Yandex reporting revenue growth of 36% as profits leapt 79% from the year-ago period in the first quarter. But, Yandex has its own set of unique problems to contend with, including the highly volatile Russian ruble, which can negatively impact its results, as well as the potential for increasing competition and high costs to expand its operations. The potential is certainly there for Yandex to keep growing, but it appears Russia's infrastructure still has a long way to go before Yandex will realize its true potential.

Source: Sheila Scarborough, Flickr.

LinkedIn
My nightmare hath returned for a fourth go-round! In all three instances previously, I've harped on LinkedIn's valuation and slowing growth, and it's proven me wrong in each instance. That's bad news for me but great news for my Foolish colleagues who've correctly called LinkedIn's upside. Unfortunately, the primary culprit, its valuation, is still what causes me to distrust the stock here. LinkedIn is largely dependent on the jobs market and a growing economy for its business to thrive. The end of QE3 could put a serious crimp on lending and trickle its way throughout the economy all the way down to the jobs market, where it could cause hiring to stall. With so many economic questions, I can't justify paying 68 times forward earnings for a company so intricately tied to the fate of the jobs market.

TripAdvisor
Last, but certainly not least, is online travel media review, information, and planning provider TripAdvisor. Working in the company's favor is the fact that few people are willing to give up their vacations even if consumer spending is tightening. However, that view is based on continued growth in China, whose demand has at least partially propped up a fragile U.S. economy. With China's potential credit crunch threatening to slow its GDP growth even further, Europe installing austerity measures across numerous countries, and the Federal Reserve ready to pull the plug on QE3 in the U.S., we could be looking at a serious global slowdown. That's bad news for TripAdvisor, which generates 78% of its revenue from ads, which are growth driven.

Foolish roundup
There you have it: the fourth installment of my overvaluation index! Will I go four-for-four? Only time will tell, but, as always, I highly doubt these valuations can hold up against the S&P 500.

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Read/Post Comments (6) | Recommend This Article (7)

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 July 02, 2013, at 4:24 PM, EvanBuck wrote:

    Re: Yandex

    Your analysis on Yandex, is interesting and correct. However, I do believe that you are overestimating and putting more weight on Yandex's risks than investors are currently putting on the stock.

    "Yandex has its own set of unique problems to contend with, including the highly volatile Russian ruble, which can negatively impact its results, as well as the potential for increasing competition and high costs to expand its operations."

    Russian ruble volatility is a given - it's part of the "growing pains" of Russian capitalism. Hopefully it will stabilize, but investors already are aware of this volatility, and still Yandex is doing very well, as you yourself admit.

    You never mentioned who the competition is, which would have been helpful. Yandex is destroying Google and Microsoft in Russia currently, so if you call them contenders, fine. But they're not very GOOD contenders. :)

    Overall, while your argument against Yandex is partially correct, you don't really point out why one shouldn't own Yandex stock. Yes, there are risks with every stock. But it appears that there isn't very much downside or reasoning that Yandex stock will go down in the short or long term.

  • Report this Comment On July 02, 2013, at 4:27 PM, EvanBuck wrote:

    Oh, and an addendum: Yandex's valuation is actually fairly reasonable in comparison to other search engine/internet company stocks. Yandex's valuation is indicative of the market's confidence that the company will continue to grow. LinkedIn, on the other hand, arguably has several years of growth already baked in to the stock price.

  • Report this Comment On July 03, 2013, at 1:59 AM, Risky88 wrote:

    buying or selling a stock on its value is dumb

    and you know it

    How many stocks does the MF say to buy in all their web services that have sky high valuations?

    TONS

    What happened to the buy and hold because what happens tomorrow doesn't matter what happens in the next 10 years does.

    I love the services but if your going to be an analyst and work for these services, don't go back on what you say people should do.

    straight up anger.

  • Report this Comment On July 03, 2013, at 6:04 AM, ronwu wrote:

    Interesting perspective and can drive discussion from different angles.

  • Report this Comment On July 10, 2013, at 12:23 PM, mtspace wrote:

    There is nothing in the method that attempts to come to terms with future changes in cash flow that might occur due to changing market conditions or from the way new companies transition into established ones. For example, they taper off on their development and/or acquisition spending (as a portion of revenue) and end up generating great piles of cash. At least that's what they are reasonably expected to do.

    TMFULOI might be (or might not be) the greatest advance in stock valuation since Ben Graham's work FOR STOCKS WITH NO FUTURE GROWTH AMBITIONS OR POSSIBILITIES, but for young companies such as the ones here analyzed, I cannot see how it adds much value since it systematically excludes the possibility of the companies ever reaching the next stage.

  • Report this Comment On July 10, 2013, at 1:12 PM, TMFUltraLong wrote:

    mtspace,

    Actually, as earnings for these companies grow, they slowly fall off the list. It's just a matter of either their earnings potential and value metrics catching up with its current value, or the stock correcting lower to reflect that difference.

    Sean

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