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TheStreet Open House

4 Big Stocks Ripe for a Sharp Pullback

H&R Block

For much of the past five years, tax preparation firm H&R Block ( HRB) traded between $14 and $20 as investors slapped a modest P/E multiple on profits, noting the maturity of the tax prep business. Yet since the start of this year, shares have risen more than 55% as investors come to expect that the looming tax changes associated with recent health care changes will spur the need for much more tax help from firms such as H&R Block.

Analysts at Morgan Stanley question whether the Affordable Care Act will really deliver the upside that these shares seem to already reflect. And they think that even with a modest bump from ACA, per-share profits are likely to rise just 10% to 12% in fiscal (April) 2014 and 2015.

>>3 Big Stocks on Traders' Radars

The fact that this stock, which historically traded with a single-digit forward multiple, now trades for more than 15 times projected 2014 profits means that much of the reward has been achieved, with ample risk still ahead. After all, this stock could go right back to a single-digit multiple if the impact from ACA is underwhelming.


Hats off to Reid Hastings. The CEO of Netflix ( NFLX) took a lot of heat last year when his company was reporting tepid sales growth and shares were in freefall. He preached patience and promised better results in the future. With shares now up more than 200% since this time last year, he's surely been proven right. Netflix has turned out to be a far more impressive operator than many realized.

Yet it's crucial to distinguish between a great company and a not-so-great stock price. The fact that this stock now trades for around 70 times projected per-share profits of $3.10 a share tells you that shares have become disconnected from any fundamental reality. While the company's bulls focus on Netflix's 15% to 20% sales growth in 2013 and 2014, serious headwinds remain.

>>4 Hot Stocks to Trade (or Not)

Those headwinds include a largely maturing U.S. customer base, ongoing losses at its international business, and a management preference for avoiding price increases, which can impede sales and margin gains. Analysts at Merrill Lynch also suspect that Netflix will soon see a lot of competition, which is one of the reasons they see shares falling to just $115. In Wall Street parlance, this is a stock that is "priced to perfection," meaning that all of the good news may already be factored in, with possible bad news unaccounted for.

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