With the market seemingly hitting a new all-time high every day, it's causing the value investor in us to get a little queasy. We just don't understand why investors are willing to pay such high values for certain stocks given that they are facing some pretty significant headwinds. Three we think have gotten well ahead of reason are Caterpillar (NYSE:CAT), Chipotle (NYSE:CMG), and GoPro (NASDAQ:GPRO).
Headwinds persist for this cat
Daniel Miller (Caterpillar): You can argue that Caterpillar boasts a wide economic moat thanks to its well-known brand, manufacturing scale, and supremely efficient dealership network, and that would be fair. However, what you can't argue is that shares look inexpensive as things currently stand. Caterpillar's price-to-earnings ratio based on 2016 adjusted profit per share is roughly 28. Looking at Caterpillar's 2017 outlook for adjusted profit per share, the forward ratio jumps to 33.
For a massive global industrial company, that's a pretty rich valuation, especially when you consider that its near-term outlook is still depressing. Management expects another decline in top-line sales, lower adjusted profit, and continued weakness with its mining customers and North American construction new equipment sales. Caterpillar also has to deal with the uncertainty facing its operations in Europe thanks to the Brexit decision.
Despite all of these concerns and declining financial performance, Caterpillar's stock price shook that off and rebounded throughout 2016.
Don't get me wrong, Caterpillar pays a dividend, has significantly restructured its business, and will one day emerge from this rut a more efficient and profitable company. But at these valuations, and with Morningstar.com's fair value estimate roughly $30 below its current prices -- which seems realistic to me -- Caterpillar's shares are just too overvalued to jump on the bandwagon right now.
I'll buy the burrito, just not the stock
Brian Stoffel (Chipotle): A few months back, fellow Fool and friend John Maxfield and I debated the merits of Chipotle's stock and its turnaround plans. I was a bear on the stock, and still am. In full disclosure, since that original article was published, Chipotle is now beating the market by about seven percentage points. But there's still a long way to go, and I believe Chipotle is overpriced.
I could go on and on about the company's food-borne-illness crisis, but that story has already played out. Instead, I just don't think the company's moat is that strong anymore. Chipotle was a first-mover in realizing how important it was to offer "Food with Integrity."
I'm glad they did -- people should know more about where their food comes from. The problem is that the competition is catching on -- and there's no real moat to prevent competitors from copying what Chipotle has done. Even more concerning, the company seems to be abandoning that concept with its new burger chain concept, Tasty Made. The store dumped its pasture-raised, hormone-free meat for conventionally grown fare last year.
While comparable-store sales have picked up recently, that isn't saying much given how terrible they were a year ago. At the end of the day, we have a stock trading for 50 times future earnings Expected to be $8.33, according to E*Trade, and about 140 times free cash flow. For a restaurant with a narrowing moat, I think that's simply far too expensive.
Losing altitude with further to fall
Matt DiLallo (GoPro): While GoPro's stock is already down more than 90% from its peak, it still has further to fall in my option, which is why I'm using options to short the stock. My main issue with GoPro is that it's a growth stock that's just not growing. Instead, the action camera maker sells products to a niche market that already appears to be saturated even as new entrants enter the market. Last year, for example, that company only sold 5.3 million units, which was down 12% from the 6 million units it sold in 2015.
Another issue at GoPro is that it has botched its recent new product launches, with its Karma drone, for example, getting pulled from the market shortly after launch. While the company recently relaunched that product and released the new Hero 5 camera, it sees first-quarter sales of just $190 million to $210 million. That's a far cry from the $540 million in revenue it pulled in during the fourth quarter. The concern is that these new products aren't expected to fly off the shelves because early adopters are not upgrading, which suggests that these products could be stale by the next holiday season.
Finally, thanks to rising competition, GoPro dove deeply into the red last year, as net income was a negative $419 million compared to a profit of $36 million in 2015. That said, even if GoPro returned to profitability and at least matched 2015's profit level, it would still be hard to justify the stock's current $1.3 billion valuation. While it's always possible the momentum could shift and the stock could soar, it is impossible to make a case for GoPro as a value stock even though it has come well off its peak.
Brian Stoffel has no position in any stocks mentioned. Daniel Miller has no position in any stocks mentioned. Matt DiLallo owns shares of Chipotle Mexican Grill and has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.