Stocks: Three Overstuffed TurkeysBy
Sometimes a stock looks so enticing that investors just can't help themselves. The market appetite is such that the stock rockets higher, leaving behind most reasonable measures of the company's worth. To commemorate this week's Thanksgiving feasts, BusinessWeek went hunting for stocks that have arguably inspired feeding frenzies over the past year. Arguments over what a stock ought to be worth are always subjective. And many of these firms deserve premium valuations: They are among the most innovative firms in the market. But, by most metrics, investors should beware before taking a second helping of these stocks. 1. Amazon.comDespite recession and weakness among consumers, online retailer Amazon.com (AMZN) has had a stellar year. And many investors expect a profitable holiday season and good prospects for the firm's growth initiatives, including the Kindle electronic book reader. Amazon is so popular among investors that its stock is up 279% from a year ago. That has brought its valuation to stratospheric heights. The most popular measure of valuation is the price-to-earnings ratio, or p-e ratio. According to data provider Capital IQ, Amazon's p-e ratio based on projected earnings in the next 12 months is an eye-popping 57.4. According to Thomson Reuters (TRI), the forward p-e for the entire Standard & Poor's 500-stock index is 14.9. Investors are willing to pay so much for Amazon stock because of its rapid growth. The firm has grown earnings at a long-term rate of almost 25%, according to CapIQ. "As long as this company is growing at a fast clip, people are going to be willing to overpay for that growth," Morningstar (MORN) analyst Larry Witt says. But if any part of Amazon's growth plans falter or its growth slows just a bit, the stock could be punished severely. And there are several reasons to worry, Witt says: New online competition from Wal-Mart (WMT) poses a threat. Or Amazon could have difficulty navigating the shift of media—books, movies, and music—to digital formats. Some observers expect profit margins to widen, but Amazon's need to have competitive low prices could get in the way. "That could scare some investors," Witt says. 2. CernerPolitical headlines can sometimes send investors flocking to particular stocks. As part of stimulus and health-care reform, policymakers in Washington have focused on improving the health-care industry's use of technology, especially the adoption of electronic health records. That has made stock market stars of health-care information technology firms, especially Cerner (CERN). Cerner shares are up 155% in the past 12 months, and its forward p-e is 29.4. That's much lower than Amazon's p-e, but Cerner's revenue and earnings growth rates are much slower. Last quarter, revenue actually fell 3% as the recession squeezed medical providers' purchases of new software and technology. Cerner, however, continues to widen profit margins, with earnings-per-share up 8% from the previous year. Robert W. Baird analyst Eric Coldwell has a neutral rating on Cerner's stock. Cerner and its industry could be entering a lucrative time as hospitals, doctor's offices, and other medical providers finally improve outdated technology, he says. But Cerner also operates in a highly regulated industry, where competition is heating up quickly. In a Nov. 18 note, he called Cerner the "gold standard for the [health-care information technology] golden age." But he added: "Gold's expensive these days." 3. Intuitive SurgicalIntuitive Surgical (ISRG) is a pioneer in the use of robotic surgery. Less invasive than traditional surgery, Intuitive's da Vinci system is catching on in a big way. The number of da Vinci procedures in 2009 could top 200,000, a 53% increase, according to Morgan Keegan analyst Lawrence Keusch. "The system represents a paradigm shift in the way conventional surgery is performed," Keusch wrote Nov. 13. The problem: As exciting as Intuitive's story is, it's already well-known. Investors have bid up the stock 230% since March, and its forward p-e is 40. Keusch says the stock is already "fairly valued" and advises waiting for a "more opportune entry point." Other analysts are even less enthusiastic. According to Capital IQ, Wall Street analysts—who are not often known for their skepticism—have given Intuitive a target price of about 254, 9% below its current price.
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