See if this sounds familiar: You're bidding for a dozen pink lawn flamingos in an online auction. There's just a minute left, and someone outbids you. You counterbid. You're outbid again. Determined to win, you offer even more money, and by the time the auction ends, you're the winner of a dozen flamingos, for which you've paid ... too much. What's worse, you know it's too much, but you got carried away in the thrill of the chase.
That happens to companies, too. Consider the 2005-2006 bidding war between Johnson & Johnson (NYSE:JNJ) and Boston Scientific (NYSE:BSX) for medical-device maker Guidant. Each company made bids and counterbids, until Johnson & Johnson finally bowed out, saying that it couldn't justify bidding any more. So Boston Scientific won -- but its stock has fallen steadily ever since. Johnson & Johnson CEO Bill Weldon explained that discipline was needed: "The testosterone starts flowing, and everybody wants to win. Well, winning could be losing."
In your portfolio ...
We can also make this same losing-by-winning mistake in our portfolios. You may chase a rising stock, waiting for it to fall as it rises, and eventually buying it at a higher price than you planned. Sometimes, you may buy overvalued stocks simply because you want to own them at any price. That's a Pyrrhic victory, though, because overvalued stocks, even when they're tied to great companies, stand a good chance of falling back near their intrinsic value.
Here are some companies that might be overvalued, with steep P/E ratios and poor ratings of one or two stars (out of five) from our Motley Fool CAPS community:
|
Company |
CAPS Stars |
Recent P/E |
|---|---|---|
|
Marriott (NYSE:MAR) |
* |
40 |
|
First Solar (NASDAQ:FSLR) |
** |
32 |
|
Wynn Resorts (NASDAQ:WYNN) |
* |
34 |
|
MetroPCS Communications (NYSE:PCS) |
** |
35 |
|
Starbucks (NASDAQ:SBUX) |
** |
129 |
If you own them, don't rush out and sell your shares, but do look into whether you think they're overvalued. There's no need to hang onto the stock equivalent of a $200 pink flamingo when there are better bargains around.
What to do
Keep a stock's value in mind. Remember the saying attributed to Warren Buffett: "Price is what you pay. Value is what you get." Don't let yourself pay too much for a stock because of exuberance or inattention.
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