Companies with high valuations share an attribute: Investors expect them to beat analysts' expectations.
The following 10 stocks are, by definition, expensive. (One of them trades at a price-to-projected-earnings ratio of 672.) If they exceed earnings estimates, the shares will retain momentum. If they miss, look out below.
Earnings season starts in two weeks, during which time the stocks listed below may become volatile. In the second quarter, the S&P 500 Index fell 12%, declining to an eight-month low on concern about slowing global economies, particularly weak job growth and consumer spending in the US.
Doug Kass goes further. He says stock-market gains are being hobbled by "rising taxes; fiscal imbalances in federal, state and local governments; the absence of drivers to replace the prior cycle's strength in residential and nonresidential construction; the long tail of the last credit cycle (Greece, Portugal, Spain, et al.); and inept and partisan politics."
Here are the 10 most expensive stocks, according to price-to-projected-earnings ratios.
10. Amazon is the world's largest online retailer, selling music, books and electronics. It was flooded with business during the recession as consumers sought bargains on the Web.
Since 2007, Amazon has increased revenue 33% annually, on average. Its stock sells for a price-to-projected-earnings ratio of 28. Its PEG ratio, a measure of value relative to predicted long-run growth, of 1.1 indicates that the stock is overpriced by roughly 10%.
9. Red Hat designs open-source software. Since 2007, it has increased net income 14% a year, on average. Its stock returned 10% a year over the same span. It currently trades at a price-to-projected-earnings ratio of 34, a 67% premium to the software industry average. Its PEG ratio of 1 indicates that the stock sells at fair value, based on long-term growth expectations. But the stock is costly based on book value, sales and cash flow per share.
8. Baidu operates an Internet search engine in China and Japan. Chinese Internet penetration is still on the rise and competitor Google has decreased its presence in the region. Baidu's first-quarter profit more than doubled and its revenue surged 60%. Its stock trades at a price-to-projected-earnings ratio of 34, a price-to-book ratio of 31 and a price-to-sales ratio of 33, 39%, 820% and 197% premiums to Internet software peer averages.
7. Vulcan Materials is the largest seller of construction aggregates, including crushed stone, sand and concrete mix, in the U.S. Vulcan's first-quarter loss widened 18% to $39 million, or 35 cents a share, as revenue fell by a comparable amount. Its net sales have plummeted 63% a year since 2007 as housing starts halted across the country. Yet, Vulcan's stock sells for a lofty projected-earnings multiple of 36 and a cash-flow multiple of 16.
6. Boston Properties is a real estate investment trust that owns office properties in urban areas, including Boston, Washington, D.C. and Manhattan. First-quarter revenue inched up 1.2% and earnings per share ascended 2.7%. The stock has surged 50% in the past 12 months, outpacing U.S. indices. But the recent surge has lowered its distribution yield to 2.3%, less than the yields of Dow Jones Industrial Average components.
5. Salesforce.com sells services and software to businesses, helping them manage customer accounts, track sales leads and store data. The company's shares have more than doubled during the past 12 months. They trade at a price-to-projected-earnings ratio of 57, a 182% premium to the software industry average. The stock's PEG ratio of 1.7 indicates a 70% premium to projected fair value.
4. American Tower owns and operates more than 22,000 cellular towers in the U.S., Mexico and Brazil. It also runs in-building antenna systems for malls, hotels and other venues. The company's first-quarter profit stretched 64% to $96 million, or 24 cents, as revenue grew 11%. American Tower's stock sells for a price-to-sales ratio of 10 and a price-to-cash-flow ratio of 20, 304% and 206% premiums to wireless telecom industry averages.
3. Toll Brothers designs, builds and markets single-family detached homes in luxury residential communities. The company has suffered net losses for 10 consecutive quarters. Its fiscal second-quarter loss narrowed 51% to $40 million, or 24 cents, but revenue dropped 22%. Toll Brothers' stock trades at a price-to-projected-earnings ratio of 87 and a price-to-cash-flow ratio of 97, 140% and 845% premiums to household durable industry averages.
2. Crown Castle International owns, operates and leases cell towers. Since 2007, it has expanded net sales 23% annually, on average. In the latest quarter, its revenue rose 10%, but it swung to a net loss of $119 million, or 43 cents, from a profit of $11 million, or 2 cents, a year earlier. The shares sell for a price-to-projected-earnings ratio of 93, a 637% premium to the wireless telecom peer average. They're also costly based on trailing earnings.
1. Dendreon is a biotechnology company. Its principle drug, Provenge, received Food and Drug Administration approval on April 29. Its stock has fallen 42% from its 52-week high on May 3. Dendreon trades at a price-to-projected-earnings ratio of 672, whereas its average peer trades at a multiple of 18. Although Dendreon remains a top pharma play, its stock is priced for unrealistic near-term growth.
Author's note: This Dendreon item was written prior to news that the Centers for Medicare and Medicaid Services said that they had begun an evaluation process to determine national coverage of Provenge. Dendreon shares fell as much as 23% to $25 in after-hours trading on Wednesday; they rebounded to as high as $30.53 as of publication Thursday.
Disclosure information was not available for Lynch or his company.