Some high-priced stocks only seem expensive on their way to triumphant turnarounds, or powering through rapid but expensive growth spurts. For others, their nosebleed valuations only stick red flags around larger problems.
Three Motley Fool contributors would like to warn you about a few consumer goods stocks that belong in the second category. Read up on why they wouldn't touch Keurig Green Mountain (UNKNOWN:GMCR.DL), Burger King (UNKNOWN:BKW.DL), or Monster Beverage (NASDAQ:MNST) with a ten-foot pole at current prices:
Tamara Walsh: Keurig Green Mountain is one of the best performing stocks so far this year, with shares up more than 107% year-to-date. The K-cup creator received a vote of confidence from Coca-Cola (NYSE:KO) earlier this year when the king of pop increased its stake in the specialty coffee company to 16%, thereby becoming Green Mountain's largest shareholder. However, the stock looks wildly overpriced today, with shares of Keurig Green Mountain now trading near the stock's 52-week high at around $154.
Sure, as the leading supplier of single-serve coffee brewers and portion packs, Green Mountain benefits from strong market share and brand recognition. Yet, much of this optimism is already priced into the stock. The stock currently trades at 41 times earnings, giving it a price-to-earnings ratio that is among the highest in the industry, particularly compared to the S&P 500's average P/E of 20.
With Green Mountain's stock trading near all-time highs, there is little room for error or misstep on the part of management. I think this makes it a risky investment at this point, especially with so much emphasis on the company's upcoming launch of its Keurig 2.0 system and cold beverage offerings.
Anders Bylund: Burger King shares have doubled since returning from a two-year stint under private ownership. If you squint just right, in a certain light, the fast-food chain's skyrocketing share prices make a little bit of sense. But most of the time, Burger King's soaring shares just seem doomed to a drastic correction somewhere down the lone.
Let's start with the (limited) upside. Burger King's earnings have more than tripled in two years. Profit margins have surged as the burger chain revamped its aging menu. A pending merger with Canadian donut shop Tim Hortons also promises to boost system sales, while efficiency-focused layoffs should drive margins even higher. These are the drivers behind Burger King's surging share prices.
Sounds like a sales pitch so far, doesn't it? Well, it gets a lot worse. Burger King may have found a new groove, but investors are overpaying for these shares -- by a lot.
Let's compare and contrast with archrival McDonald's (NYSE:MCD).
You can buy a McDonald's share for 19 times trailing earnings and 3.3 times sales. These are farly average figures for the restaurant industry, with the earnings-based ratio running a little low and price-to-sales sitting a little high.
Burger King shares sell for 10.8 times trailing sales and a nosebleed-inducing 65 times earnings.
Look, I'm no stranger to paying a premium for rapid growth or rich margins. But I do have a problem with ultra-high prices on one of the largest players in a very mature industry, and that's what we're looking at here.
35% of Burger King's shares are sold short these days. At these prices, I can't argue with the pessimists.
Alex Planes: Tamara highlighted an old consumer favorite of mine, and it's hard to disagree with her analysis. Green Mountain's stock is up more than 500% in two years, but its P/E ratio has also quadrupled in that time. But Green Mountain isn't the only caffeinated beverage purveyor that's ridden a wave of investor optimism to new highs over the past two years -- Monster Beverage is up 140% in two years, but its P/E ratio has nearly doubled, from just over 20 to more than 40 today.
Like Green Mountain, Monster is a leader in its space (energy drinks), and has enjoyed strong fundamental growth over the past few years. But in the past five years, its P/E has averaged 27.9, which is far lower than it is today. Monster's sales growth is also slowing down to rates more indicative of a mature industry than one with a long runway ahead, and while its earnings have been improving at a more rapid clip, that trend can't continue forever in a retail-oriented industry that has limits to its pricing power.
Make no mistake, Monster is a great company and has been a great stock to own over the years. I often go out of my way to find my favorite Monster flavors (Ultra Black, followed by Red and Blue, if you were wondering) when I need an energy boost. But in a market downturn, high-priced stocks are usually the hardest-hit, and optimism around Monster's recent deal with Coca-Cola may wear out before the deal's full benefits can be known.