With the S&P 500 surging roughly 25% in the past 12 months,
it's been a great time to have full exposure to the stockmarket .
Yet market strategists continue to remind investors that they
should only expect 6% to 8% gains annually from your stock
investments. This helps explain a growing sense of caution and
restlessness in the market. After all, we've been climbing up the
"Wall of Worry" as the twin fiscal messes in Europe and the United
States threaten to push our respective economies intorecession . As
I noted a few weeks ago
, "the market can go down a lot faster than it goes up."
That's why it's imperative you continue to play defense and
build some short positions into your portfolio, or at least
avoidovervalued stocks. I went in search of stocks in the S&P
500 that may have peaked and may be vulnerable in a weaker market.
These stocks have all risen at least 25% during the past six
months, but are expected to post slow (or negative)profit growth in
Here are four that stand out…
1. Tesoro (NYSE:
Oil refineries (which convert crude oil into gasoline, diesel and
other distillates) have seen their stocks catch fire this year as
industry profit margins have moved up. The credit goes to expanding
profit spreads as industry refining capacity moved down to the
level of demand.Shares of this refiner have been perhaps the
greatest beneficiary as it rose a hefty 69% during the past six
As a result, this stock more than reflects the good times at
hand. For example, of the eight refiners Goldman Sachs follows,
Tesoro has the highest 2013 price-to-earnings (P/E ) ratio of the
group, at 8.6. Yet Tesoro's operatingcash flow andnet income are
expected to actually decline in 2013, as the 2012 environment for
this and other refiners may be hard to replicate. Analysts
expectearnings to fall by more than $1 per share in 2013 to around
$5.56. This stock has made a great run, and now looks to be a prime
2. Lennar (NYSE:
This homebuilder's six-month gain of 49% is surely impressive. The
fact that shares are up more than 125% during the past 52-weeks is
even more impressive. As is the case with many homebuilders, Lennar
has begun to aggressively expand again, building homes on acquired
properties that had been moth-balled during the Great Recession.
Yet investors may be confusing supply with demand. Just because
home builders are set to build a lot more homes in coming quarters
doesn'tmean sales will rise at a commensurate pace. In fact, these
homebuilders run the risk of creating another glut, as they still
have to contend with hundreds of thousands of existing homes that
are already for sale, or will soon appear on the market as sellers
test the waters again.
At the end of the day, home builders are reallyasset plays. The
fact that this stock is now worth more than two times tangiblebook
value tells you investors have already paid up for a very robust
future that may take its sweet time in getting here.
3. Amgen (Nasdaq:
In recent years, this once-hot biotech play has looked more like a
slow-growing Big Pharma stock. Sales grew at a double-digit pace
annually up until 2007, hitting $14.8 billion. Yet four years
later, they had risen to just $15.6 billion, representing a
compound annual growth rate of just 1.5%.
But in recent quarters, management has decided to raise the
company's profile by boosting research and development efforts on
new drugs,dividend hikes and share buybacks. That's helped fuel a
33% gain in the stock during the past six months to an all-time
Trouble is, Amgen's new drugs will only help take up the slack
as growth slows for existing drugs --especially its key ESA
(erythropoiesis-stimulating agents) drugs Epogen and Aranesp.
Merrill Lynch's analysts looked out during the next five years
worth of cash flow and figures that the sum should equate to a
stock price of just $83, below the recent $89 trading range.
4. Merck (NYSE:
Amgen looks like a cheetah compared to this drug giant. Sales are
expected to fall $500 million this year to around $47.5 billion and
even further by 2013 to about $46 billion. That's what happens when
key drugs start to lose steam. For example, Nasonex, Cozaar/Hyzaar
and Singulair, all of which are generating more than $1 billion in
sales this year, are expected to see sales decline in 2013.
So why have shares moved up 23% in the past six months? A rising
stock market gets some of the credit. You can also point to
tightening cost controls that should keep profits from falling at
the same rate that sales are. Still, this is a stock that used to
sport a high single-digit P/Emultiple that now sells for nearly 13
times projected 2013 profits. That's the highest forward multiple
for Merck in five years, and this stock is quite vulnerable when
investors look to lock in profits on recent gainers.
Risks to Consider:
As an upside risk, these stocks can keep levitating if the
market moves higher, though there are surely more appealing
value-oriented plays if you arebullish about the months ahead for
Action to Take -->
A series of short-term drivers has boosted these stocks, from a
spike in oil refining margins to an increase in the dividends, to a
sense that the housing market will soon catch fire. But as you dig
deeper into these drivers, then it's hard to see how they will fuel
even further upside in 2013, considering future gains are already
baked in to these stock prices.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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