Over-hyped and over-valued stocks are getting pummeled. But there are still five widely watched stocks that have somehow escaped the comeuppance of high-flying stocks, that might be next to get hit.
New Constructs uses a sophisticated computer model that estimates expected future cash flows of companies and measures what those cash flows are worth today. It's similar to the value approach advocated by famed investor Warren Buffett.
And with that approach, the stocks New Constructs is warning against include:
Angie's List. The companies allows consumers to rate and share reviews of businesses. But unlike Yelp, which provides this service for free, Angie's List charges a fee. While Angie's List says its reviews are more trustworthy since members pay to below to the service, New Constructs followed the money and found the company gets 75% of its revenue not from member fees, but from businesses paying to advertise on the site.
The company is also bumping up its marketing spending to lure new customers. The bottom line is that the stock is priced for perfection, when the truth is far from perfect. The current stock price values the money-losing company so richly that it would need to have pre-tax profit margins of 5% and boost revenue by 25% a year for the next nine years to justify it, says New Constructs.
Netflix. Consumers might think subscribing to Netflix is the best deal going, but it's costing the company a princely sum. Netflix has "future cost obligations" for its streaming content of $7.2 billion in fiscal 2013, says New Constructs. That's fine, except the company only collected $4.3 billion to pay for those skyrocketing fees.
The recently announced price hike won't solve the problem, either, since it's too small and doesn't start for current customers for two years, New Constructs says.
To meet the current stock price, the company needs to boost its net operating profit after taxes, a loose measure of cash flow, by 31% a year on average for 11 years. Good luck with that.
Flagstar Bancorp. It's never good when a company reports a big profit following accounting rules, but bleeds cash. But that's the situation at this bank, says New Constructs. The company reported a tax benefit of $340 million and lowered its loan-loss liability in $100 million.
That might sound like accounting mumbo-jumbo, but it helped the company report a profit at $245 million, when posted a net operating loss after taxes of $185 million. If the stock falls to its tangible book value, that could mean a stock drop of 12%, says New Constructs.
Workday. Cloud computing stocks might be all the rage with investors, but savvy investors know when a stock is too sky-high. Workday's net operating profit is nowhere near it needs to be to justify its market value of $13 billion, says New Constructs.
The company needs to boost revenue by 40% a year on average for a decade, no small order, while keeping its net operating profit after taxes margin of 9% to grow into its valuation, New Constructs says.
Costamare. The container-ship company is a good example of why just looking at a P-E doesn't tell the whole story. Despite its P-E of 16, which is roughly in-line with the market if not slightly below, the company has been loading up with debt.
The company now has $1.9 billion in debt, which is greater than its market value, says New Constructs. It's taking on this debt because its burning cash on a free cash flow basis.
The company needs to grow its net operating profit after taxes by 11% a year for 17 years before its valuation makes any sense, says New Constructs.
Ignoring these warnings can be costly. Four of the five stocks on New Constructs' list of the most dangerous stocks issued on March 20 trailed the market. An equal-weighted index of the most dangerous stocks is down nearly 7% since the warning, well below the nearly 2% gain by the Standard & Poor's 500 index during that same time.
Some of the individual stocks have been nightmares. One of those stocks, LinkedIn, was the posterchild of the tech-wreck this year, which resulted in massive corrections in shares of Internet stocks. Shares of LinkedIn, a professional social networking company, are 27% since the warning. Another big loser was AOL. Shares of the online media company are down 15% since New Constructs' warning.
The only stock New Constructs warned against that didn't fall was video-game maker Electronic Arts, which rose 17%.
—By Matt Krantz of USA TODAY