By David Sterman
NEW YORK (TheStreet) -- Stocks fell from a six-month high, putting a pause in the 13% rally that started at the end of August. Investors may have found that many stocks are overvalued, putting them most at risk if the market keeps falling.
I ran a screen for stocks that have risen at least 40% in the past three months and sport 2011 price-to-earnings ratios above 40. Some of the slow-growth companies, in particular, don't merit such a strong move.
The logical rebounders: Some of these stocks are here simply because they were too undervalued earlier in the summer. In July, I suggested that Amazon.com (AMZN), trading at $120, was due for a rally and predicted that "as investors start to once again embrace the company's robust long-term outlook, shares should eventually power past the $150 mark seen earlier this spring" (Read Long-term Gains Will Come from this Tech Giant's Short-term Pain.) With the stock now at $170, it's hard to find any appeal, as it now trades for 47 times next year's profits. In a similar vein, health-care-information vendor Athenahealth (ATHN) also looked like the victim of too much pessimism in the summer. Now with a much loftier P/E multiple, which is nearly twice next year's sales-growth forecast, it looks like too much optimism is the name of the game. When the market gets carried away: I am among thousands of happy Netflix (NFLX) customers. The video delivery and streaming service continues to attract new subscribers at a stunning pace, and that's pushed its stock into the stratosphere, trading at more than 40 times projected 2011 profits. But I've seen this picture before. In 1999, Wal-Mart (WMT) had a very rich multiple, as investors assumed strong growth would continue forever. But growth started to decelerate, and the shares slowly lost that P/E premium. A decade later, shares of Wal-Mart have gone nowhere, and still-rising sales were met with an ever-shrinking P/E. I fear a similar fate will befall Netflix. Netflix is a company that can't afford to stumble. One so-so quarter, and this stock is toast, as expectations are so high. If you own shares of Netflix, it may be time to part with a stock that has been a real winner. Travelzoo's (TZOO) growth spurt: This online travel site has surely posted impressive recent results. Profits for the September quarter were double the consensus forecast, as the company saw a 17% jump in revenue. Results were depressed in 2009, but demand for travel is clearly on the mend. Yet investors are clearly getting carried away, assuming the company can grow at a very fast pace in the next few years. After all, the online-travel market is largely mature, with formidable competition coming from the likes of Priceline.com (PCLN) and Expedia (EXPE).
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV