Good riddance, 2009. Welcome in, 2010. What's in store? The honest answer is: I don't know, and neither do you. But there are companies I wouldn't dare touch as we enter the New Year. Here are three, along with a few reasons why.
Don't beat around the bush: (NASDAQ:AMZN) currently trades at about 53 times 2010 earnings estimates. Those who own the stock speak endlessly about how well shares have performed lately. Analysts revere the company in ways most deities would envy. This should scare you. 

What's ironic is that we're staring the next decade with parallels to how we started the last. A decade ago, the story was:

  • You don't understand: Amazon is changing the way retail works. 
  • NASA can't even calculate its growth potential.
  • Management is brilliant.
  • But holy smokes, it's ridiculously overvalued.

Today, the story seems to be:

  • You don't understand: Amazon isn't a bookstore; it's a retail king. And a crouching tiger in cloud computing.
  • Kindle will replace everything you put in front of your face.
  • But … hmm … are shares overvalued?

Amazon is an extraordinary company that will grow internally for years. Average estimates call for more than 25% growth for at least five years. Shareholder returns are another thing entirely.

A decade from now, we'll probably reflect on Amazon's achievements, but wonder why shareholder returns were pathetic at best. That's just the nature of a stock that sells for nutty multiples. Ask anyone who invested in Google (NASDAQ:GOOG) or Chipotle (NYSE:CMG) in late 2007, or Microsoft (NASDAQ:MSFT) in 2000. When a company is priced for perfection, it's quite possible to grow revenue and earnings at fierce clips, but still leave shareholders in tears. It happens over and over and over and over again. 

I won't belabor the story behind credit rating agency Moody's (NYSE:MCO). Its shortcomings are well-documented. Instead, I'll focus on three potentially overlooked headwinds:

  • Regulatory roundhouse: A few weeks ago, the House of Representatives passed a mammoth 1,279-page financial overhaul bill. Part of the bill honed in on rating agencies, with a goal to "reduce market reliance on credit rating agencies, and impose a liability standard on the agencies." Digging deeper, you'll find threats to "remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations." To be fair, the language of the bill is less ruthless than some imagined. But frankly, I'd prefer not to be on the naughty list of legislators who like to grandstand and inflict pain just to prove a point.
  • New competition: The key arguments in support of investing in the rating agencies is that competition is meager. In general, it's true. But earlier this month, Morningstar (NASDAQ:MORN) came out announcing it'll begin to dabble in credit ratings, too. Morningstar's press release put it best, saying "Investors benefit when they have access to multiple perspectives on an investment." Hear hear! And joining the game while the big rating agencies are mending bruised reputations is the most effective time to do some damage.
  • Value, meet reality: I don't think Moody's is going out of business. I don't think it'll be regulated into nothingness. But when you look at shares currently trading at 16 times earnings, and a balance sheet heavily composed of goodwill and intangibles, then factor in the above two threats, I don't see how investors are setting themselves up for anything but dice-rolling or misery. 

Caterpillar (NYSE:CAT) is up nearly threefold since bottoming out in March. That's fantastic. But asking whether the rebound has been overkill might be useful. And I think the answer is yes.

Shares currently trade at about 21 times 2010 earnings estimates, which seems extreme. But this isn't an entirely helpful metric, because earnings could explode if global economies rebound from what some see as currently depressed levels.

Fair enough. So we'll take a longer view and look at four-year earnings per share estimates:









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

Looks great. But then I looked at Caterpillar's 15-year average P/E multiple. It's 15. So, let's say everything goes according to plan and earnings double to $5.21 per share. Then we'll slap a historical average 15 multiple on the stock, which would bring shares to about $78 (compared to today's price of $58) by 2013, or an average compound yearly return of 7.7%. Two conclusions come from this:

  • If a company doubles its earnings, you deserve a heckuva lot more than 7.7% per year.
  • What if global economies don't spring back? What if infrastructure, housing, and commercial real estate fall back into misery? Crazier theories have been proposed. There's no room for error here.

Your turn to chime in
I don't think any of these companies are inherently terrible; just that factors seem stacked against them. What do you think? Feel free to share your thoughts in the comment section below.