By David StermanNEW YORK ( TheStreet) -- A way to spot undervalued companies is to look for those with earnings growth rates that are higher than their price-to-earnings ratios. They're known as low-PEG stocks, or stocks with a PEG ratio below 1. (For example, a P/E of 10, and an earnings growth rate of 20% yields a PEG ratio of 0.5, or 10 divided by 20.) The converse is also true. Companies with high PEG ratios can be overvalued. They sometimes make compelling short-selling candidates. So I went looking for companies that have P/E ratios that are at least twice as high as earnings growth rates. In other words, they have a PEG ratio above 2. On the table below, I've compiled a list of high-P/E stocks that show either small or negative profit growth forecasts for 2011. For most, profit growth is expected to turn negative next year, but the basic concept of a too-high PEG ratio still applies.
It's worth adding that Limelight Networks ( LLNW - Get Report) and InterNAP ( INAP - Get Report), a pair of Akamai rivals, also make this list. Each stock carries a super-high P/E ratio, which would be understandable if each company was just getting going. But this is a mature industry, and these companies are likely to only grow in single digits in 2012 and beyond. So it's hard to see how earnings will grow fast enough to ever justify such a lofty P/E ratio. The earnings look back: At first glance, it makes sense that boat builder Marine Products ( MPX - Get Report) sports a very high P/E ratio. Boat sales are depressed and profits will be more robust when the economy improves. Back in 2005, the company earned a record $0.65 a share, and the stock trades for about 10 times that figure. But that was a peak year. In the past 10 years, annual EPS has averaged $0.30. And shares don't deserve to trade at 20 times average annual earnings, since this is a highly cyclical business. This stock has nearly doubled since the summer of 2009, but it looks as if investors are over-estimating the prospects of robust profits in the future. A high-growth P/E for a low-growth company: Perhaps no company on this list better typifies the perils of a high PEG ratio than retailer Sears Holdings ( SHLD). Profits are going nowhere, but you can't just blame the weak economy. Management has spent the past five years squeezing cash out of this business, leaving Sears and Kmart stores badly in need of sprucing up. As analysts at research firm ISI noted in a recent report, Sears Holdings generated no free cash flow in the first half of 2010, but still bought back $273 million in stock. Their conclusion: "We continue to believe that underinvestment will not support the asset base and find much better opportunities (elsewhere) in retail." They see shares falling from a recent $73 down to $52 as they predict that current consensus profit forecasts are too high. Analysts at UBS see shares falling down to $56 and rate the stock a "sell." They have a point -- shares trade for more than 30 times UBS's 2011 profit forecast.
Action to take: The only time you can justify a high P/E ratio is when a company has not begun to reap the benefits of projected strong growth. But the companies on this list are largely mature, and unlikely to see a big spurt in profits down the road. Sears Holdings, in particular, carries the value of a hot tech stock but is really a lumbering giant whose best days have passed. If you hold any of these stocks, consider selling. And for those investors looking for a short candidate, the list above is a good place to start. This article originally appeared on StreetAuthority. To read more articles from David Sterman on StreetAuthority, you can visit this link.