Three Popular Stocks With Glaring Flaws

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BOSTON (TheStreet) -- Yesterday's stock-market drop, the worst in seven weeks, shows investors' wishful thinking crumbles when reality hits. Perhaps the worst bets are overpriced popular companies. Here are three with glaring flaws.

At $81, Amazon(AMZN Quote) is overpriced. A discounter trading at an outsized premium is a contradiction. The shares are selling at a 2009 price-to-earnings ratio of 48 and a 2010 P/E of 37. And the stock has already climbed 58% in 2009, outpacing all major indices. Although Amazon has dropped from its annual high of $93.87, it may fall further.

The Kindle II e-reader is a revolutionary product, and I am impressed by Amazon's courageous entry into consumer electronics. But analysts have a grasp on product sales and Apple(AAPL Quote) isn't going to let the e-book market go uncontested. Apple's Tablet is expected to debut within a year.

Amazon will endure heavy competition if Apple launches an iTunes book store. And although its ventures into cloud computing and e-commerce consulting paved important growth avenues, they have done nothing to improve the company's thin margins.

Amazon's second-quarter operating margin fell from 4.5% to 4% and the net margin shrank from 3.9% to 3.1%, as the company scooped up around $142 million of quarterly profits, a 10% drop from a year earlier. The company's bread-and-butter North America media revenue remained flat.

A report released last Thursday by NPD showed that U.S. video-game sales fell 29% in July, a sign that consumer retrenchment is an ongoing and underestimated market force. Video game-related sales make up a sizable chunk of Amazon's media revenue.