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 Stocks Too Hot Not to Cool Down

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Even in this range-bound market, some stocks defy gravity and seem to only want to go up. As tempting as these rockets seem, that old stock market cliché; “trees don’t grow to the sky,” still holds true.

With that in mind, here's a screen for identifying stocks that have probably gone up too far, too fast, and thus, no matter how tempting, would best be avoided.

User Friendly Stock Screener

 As is often the case, I’ll use the free FINVIZ (finviz.com) stock screener to describe how you can find them. If you’re not familiar with the term, a stock screener scans the universe of stocks for those meeting your selection criteria. Although I’m using FINVIZ, in many instances you could run the same screen using your broker’s stock screener.

Select Screener from the FINVIZ homepage. Then, select “All” to see the complete list of available screening filters (selection criteria). To activate a particular filter, use its dropdown menu to pick a selection value. We’ll start by identifying recent high-flyers.

Defining Hot Stock Universe

For starters, we’ll identify stocks that have doubled in share price over the past 12-months. Do that by using the “Performance” filter and select “Year +100 percent.” Then, to assure that we’re looking at actively-traded stocks, using the average volume filter, specify “over 100 K” to limit your list to stocks trading more than 100,000 shares daily.

Next, we’ll pinpoint overvalued stocks as gauged by three different valuation ratios.

Finding Overvalued

The price/book (P/B) ratio compares the share price to shareholders equity (book value). Ratios below one reflect out-of-favor value-priced stocks, while most growth stocks trade at ratios between one and five. Use the P/B filter menu to specify “Over 5” to limit your list to stocks considered overpriced by that measure.

In a similar vein, the price/sales (P/S) ratio compares the share price to trailing 12-months per share. Just like P/B rations, P.S ratios below one signal value-priced stocks, while most growth stocks trade at ratios above one, but below five. So, use the P/S filter and specify “over five.” 

While the price/earnings ratio (share price divided by 12-month’s per-share earnings) is a popular valuation measure, it falls short for our purposes because the market places higher values on fast earnings growers than it does on slower growers. The PEG ratio, which compares P/E to expected earnings growth, is a more realistic value gauge. Most market players consider a PEG equal to one as “fair value,” “in-favor” stocks often trade at higher PEGs. Using the PEG filter, select “Over three,” to limit your list to clearly overvalued stocks.

Most Overvalued

Using the search terms I’ve described produced a list of 16 overvalued stocks. Here, with PEGs above 5.0, are the most overvalued:

Vicor (VICR) PEG 18.4,

China Lodging (HTHT) PEG 11.1,

Baozun (BZUN) PEG 10.5  

Autohome (ATHM) PEG 9.0

STARR Surgical (STAA) PEG 7.2

Quidel (QDEL)  PEG 6.5

More Overvalued Stocks

These stocks, more modestly overvalued, all have PEGs between 3.0 and 5.0:

Axon Enterprise (AAXN), Inogen (INCN), ETSY, Inc. (ETSY), TechTarget (TTGT), Align Technology (ALGN), GrubHub (GRUB), Netflix (NFLX), Medifast (MED), Canada Goose (GOOS), and Lululemon (LULU).

You can use this link to see which stocks the screen is turning up today.

This list is intended to identify exceptionally risky stocks. However, some stocks can stay overvalued for a long time. Use caution if you’re intending to short these stocks.

published 5/28/18

 

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