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20 Stock Landmines That Could
Destroy Your Wealth in 2014
Released January 17, 2014
The good times keep rolling on Wall Street.
Fresh off the best year for stocks since 1997, U.S. markets are showing no signs of slowing down.
Volatility is at a seven-year low. And despite being near an all-time high right now, the S&P 500
is trading at 16 times forward earnings – a valuation that is considered to be within a normal
historical range.
With the U.S. economy gradually improving and earnings growing, there are many reasons to
believe the current bull market will continue. As a result, our outlook on the stock market as a
whole is positive.
But there are pockets of stocks that appear to have gotten ahead of themselves. With the S&P
500 rising 29% in 2013, there are many large stocks that soared more than 100%.
As stock prices have risen, investors’ appetite for risk has increased. In their quest for higher
returns, many investors have piled into go-go growth stocks – companies that have bright
prospects in growing industries. As a result, they have become the darlings of Wall Street and
their share prices have surged.
Investors who got into these high growth stocks in early 2013 reaped huge profits.
In the $100k Portfolio, my subscribers and I profited from some of these go-go growth stocks.
Specifically, Netflix (Nasdaq: NFLX) and Tesla Motors (Nasdaq: TSLA) have been our
two biggest winners by far. Netflix shares have returned 375% since we bought them in
December 2011. Meanwhile, Tesla shares have advanced 320% in just 11 months.
But the biggest gains for those two stocks are almost certainly in the past. Both have risen so fast
that they have quickly become overvalued. Netflix is now trading at 83x forward earnings while
Tesla trades at 111x forward earnings. These rich valuations are based on little more than
speculation and investors’ increasingly high risk appetite.
It’s unrealistic to expect Netflix and Tesla to continue advancing at such a rapid pace.
On a related note, I doubt we’ll see the same 29% gains in the S&P 500 that we saw last year.
And though there are no imminent signs of a correction, it’s not unreasonable to expect one at
some point this year. After all, it’s been more than 550 days since the S&P had its last pullback
of 10% or more.
If and when a correction occurs, the stocks that have become the most overvalued could fall the
furthest. In my opinion, richly priced stocks trading at over 100 times earnings could fall as
much as 20-30% in the event of a correction.
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I call these stocks “landmines” – ticking time bombs that could have a devastating effect on any
investment portfolio.
In order to avoid landmine stocks, you must first identify them. In this report, I’ve identified 20
high-risk stocks that could be overdue for a major correction.
These 20 American stocks meet the following criteria:
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Market caps of more than $2 billion
Forward PE ratios greater than 50
Profit margins of less than 10%
Share price gains of at least 100% in the last year
Let me explain why I used these criteria to identify potentially risky stocks.
I focused on mid- and large-cap stocks because these are more widely owned than smaller
companies. There are of course many small companies that also meet these criteria, but I
wanted to focus on stocks that our readers might realistically own.
In terms of valuation, I wanted to look at stocks that were trading for at least 3x the earnings of
the S&P 500. While the S&P 500 is an index of large American blue-chip stocks, its valuation is
a good way to benchmark other stocks. It’s easy to see that companies with PE ratios of greater
than 50 are trading at a huge premium to the market.
Such high valuations might be justified if these companies had big profits. But all of them have
profit margins of less than 10%. That means that despite their juicy valuation, they don’t earn
much profit.
And finally, I looked for stocks that have seen their shares double in the last year. Strong stock
performance on its own isn’t a reason to sell a stock. But when coupled with high valuations and
low profits, that points to a risky stock that may be due for a correction.
Exactly 20 stocks fit these criteria. Together, they trade at an average forward PE of 216. Yes,
you read that right: 216 times earnings. Remember that the S&P 500 trades at just 16x forward
earnings.
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The 20 Landmine Stocks to Avoid in 2014
Stock
Forward
PE
Share Price Gains in the
Past Year
Profit Margin
Alkermes (ALKS)
N/A
115%
3.3%
3D Systems (DDD)
73.5
115%
9.5%
Fifth & Pacific (FNP)
85.8
114%
-3.3%
Illumina (ILMN)
60.8
139%
8.7%
Incyte Corp. (INCY)
705
230%
-5.8%
Live Nation Entertainment
(LYV)
416
113%
-1.9%
Medidata Solutions (MDSO)
N/A
170%
N/A
MGM Resorts (MGM)
106.8
100%
-14.6%
Netflix (NFLX)
82.8
239%
1.7%
ServiceNow (NOW)
436.9
121%
-15.9%
NPS Pharmaceuticals (NPSP)
91.1
297%
-26%
Pandora (P)
N/A
223%
-9%
Splunk (SPLK)
613.4
139%
-19.6%
62
105%
0.2%
Tesla (TSLA)
110.7
381%
-8.7%
Tyler Technologies (TYL)
56.1
107%
9.5%
WageWorks (WAGE)
76.5
254%
9.1%
WebMD (WBMD)
77.5
213%
-0.4%
Yelp (YELP)
426.3
298%
-6.5%
Zillow (Z)
185.6
173%
-8.4%
Averages
215.7
182%
-4.1%
T-Mobile (TMUS)
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As you can see, the majority of these companies weren’t even profitable last year. Some never
have been – and aren’t projected to turn a profit in the coming year, either.
You’ll notice that two of our biggest winners - Netflix and Tesla Motors - also made the list.
That’s why, bit by bit, I’ve been selling off our positions in those two stocks over the last few
months. Sometimes, even your biggest winners can rise so high that they eventually become a
landmine.
That’s exactly why I’m warning Wyatt Investment Research readers to start paring back their
ownership of highflying growth stocks. While these stocks delivered huge profits in 2013, those
big gains are likely a thing of the past. By selling some or all of your shares now, you can lock in
profits and free up capital to invest in the next big thing.
2013 was a special year on Wall Street, and many growth stocks benefitted. But you shouldn’t
expect it to happen again this year. Any one of these stocks could come crashing back to earth at
any moment. Make sure you’re not along for the ride when it happens.
Good investing,
Ian Wyatt
Editor-in-Chief
$100k Portfolio
Chris Preston
Contributing Editor
$100k Portfolio
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