"Risk-on" and risk-off" are remarkably straightforward notions.
When investors are
bullish
, they increasingly migrate into ever-riskier stocks, either ones
that sport higher valuations, or ones that are small but
potentially quite promising. Yet after a six-month stock
market
rebound, the "risk-on" trade may be wearing off. And if markets
pull back, get ready for the "risk-off" trade (also known as a "
flight to quality
"), where investors shift funds back into assets that are most
likely to preserve capital.
Right now, a number of stocks in the S&P 500 have moved into
nosebleed territory in terms of projected 2013 price-to-earnings
(P/E) ratios. Here are the 10 most richly-valued stocks in the
S&P 500...
In their favor, at least some of these companies can back up their
lofty valuations with robust
profit
growth. For example,
Amazon.com (
AMZN
)
,
Crown Castle (NYSE:
CCI
)
and
Host Hotels (
HST
)
are all expected to boost profits at least 25% in 2013.
Yet for many other high P/E stocks, it's simply hard to fathom why
investors think they deserve such a large multiple.
I went back and refined the list of the priciest stocks in the
S&P 500 by excluding companies that possess robust assets that
may not be captured by
earnings
forecasts -- such as energy plays, insurers and
real estate
investment trusts (REITS) -- and found 15 stocks that sport 2013
P/E ratios at least 150% higher than their projected earnings
growth rates (i.e. a
PEG
ratio of 1.5 or higher).
Some of these companies are richly valued simply because they have
built up an impressive long-term track record.
Salesforce.com (
CRM
)
,
Whole Foods Markets (
WFM
)
and
Chipotle Mexican Grill (
CMG
)
have developed cult-like followings among investors, and
short-sellers have been battered by trying to bet against them.
Still, it's crucial that you constantly re-check your forward
growth assumptions for these stocks, as strong growth can't
continue forever. If you've ridden these stocks up to huge gains
over the last few quarters, then you need to be doubly sure they
are still worth holding.
Health care challenges
Any time you see a high-PEG stock in the health care sector, you
really need to tread cautiously. Industry cost pressures may make
it harder for all players concerned to keep growing. As is the case
with likes of Chipotle, salesforce.com or Whole Foods,
Intuitive Surgical (Nasdaq: ISRG)
is the "must-own" name in health care, thanks to the company's very
popular line of surgical spine tools.
For a number of years, investors have suspected that Intuitive
Surgical would make a great
acquisition
for a larger healthcare company seeking new paths to growth. Yet it
would take $25 billion or more to acquire this company at a decent
premium, and who has that kind of money lying around?
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More to the point, this is no longer a high-growth company. Gone
are the days of 40% to 60% growth. Sales are now on pace to grow at
a mid-teens clip, and that may start to lead some key shareholders
to cash in profits and seek better opportunities elsewhere. The
fact that this stock trades for more than 10 times projected 2012
sales of $2.08 billion is grounds enough to give pause.
Risks to Consider:
If stocks move higher still, these stocks are unlikely to be
hit by profit-taking and may yet continue to climb.
Action to Take -->
Some of the stocks in the tables above have made investors huge
profits in recent years. It's hard to part with something that has
worked so well, as investors like to "let their winners ride." But
cashing out of some of these huge gainers and redeploying funds
into lesser-known and cheaper stocks could help extend a
portfolio's winning streak. Even a move to cash makes sense in the
event these high-flying stocks take a big hit and can be rebought
at lower levels.
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-- 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.