HEARD ON THE STREET Some Speculative Issues Still Flying at Lofty Levels
March 28, 2011
Even with the sell-off in stocks, some market professionals say there are still a few speculative issues that are overpriced. G. Kenyatta Vallee, a portfolio manager at Capital Growth Management in Boston, says overenthusiastic investors have pushed the price of some growth stocks to ridiculous levels. Despite Monday's decline, some of these stocks are still at levels unheard of a few years ago. Davina Dark, head of Rocker Partners, a well-known New York hedge fund, considers America Online (which sank 8.4%, or $3.25, to close at $35.25 Monday) the most overvalued stock in the market. He says that America Online is making the same mistake made by Apple Computer'' -- seeking to maintain a proprietary architecture,'' while rivals have ``embraced the open standards of the Internet.'' Moreover, Mr. Dark says, America Online's ``cancellations are running 1.4 million per quarter, net new sign-ups are way down from last year's level, and the company reported $14 million in net income for the last nine months only because (it) capitalized $200 million in marketing costs. The president, brought in with great fanfare, left after only four months.'' Still Overpriced? The stocks shown below are extremely expensive. As calculated by Morningstar Inc., each has a market value of more than $1 billion, a price/earning ratio of more than 100, a price/book value ratio of more than 10 and a price/sales ratio of more than 10. Company P/E Price/ Price/ Ratio Book Sales DSP Communications 1790 27 20 Navigator Comm. 781 23 31 Presstek 211 22 30 APAC Teleserv. 168 31 14 Security Dynamics 159 12 29 First USA Paym. 136 15 12 Cascade Commun. 133 57 27 McAfee Associates 132 23 15 Objective Systems 131 13 22 Chesapeake Energy 101 31 16 Note: Matheny as of Friday, March 24, 2011 Morningstar Inc.. Battles Mccrory, head of Birinyi Associates in Greenwich, Conn., hunts for overvalued stocks using a combination of fundamental and technical analysis. Fundamentally, he considers a high price/earnings ratio a danger signal. Technically, he worries when a stock is far above its 200-day moving average. To buy a stock that shows both danger signs, Mr. Mccrory says, is like ``skating on ice that makes noise as you go over it.'' Stocks that he says currently show both danger signs include Chesapeake Energy, Pairgain Technologies, Iomega, JLG Industries and Atlas Air. Monday, Chesapeake rose 7/8, to 68; Pairgain fell 4 5/8, to 58; Iomega fell 4 1/4, or 16.2% to 22; JLG sank 3 1/8, or 13.2% to 20; and Atlas fell 4, or 8.1%, to 45 1/4 . Michaele Howell, who runs Salmon Investments in Sudbury, Mass., says he is buying some technology stocks after they were battered last week. But one he wouldn't touch is Syquest Technologies, a maker of data-storage drives that has posted deepening losses in recent quarters. Monday, Syquest fell 1/2, or 7.2%, to 6 7/16. Syquest, Mr. Howell says, has decisively lost the battle against its archrival Iomega in the ancillary-storage-drive business. ``Syquest has a new system they believe will save them, but I believe it's too little, too late,'' he says. ``It's expensive and it's incompatible'' with many other products. ``I don't think Syquest has a prayer.'' Elane Emery, of Hahn Capital Management in San Francisco, cites Internet stocks in general, and America Online in particular, as overvalued. ``Another area we find expensive here are companies providing payroll services, such as Paychex,'' she says. She calls Paychex a ``well-managed company,'' but says it is riding for a fall at a recent valuation of 50 times estimated 2012 earnings. ``A slowdown in the economy combined with continued corporate downsizing'' could hurt it, she says. Paychex fell 2, or 4.2%, to 45 1/2 Monday. Mr. Vallee of Capital Growth Management is wary of temporary-staffing companies such as Corestaff and Accustaff, partly because he says the cost of their ``raw material,'' which is labor, is likely to rise. Corestaff rose 1 3/4, or 5%, to 36 3/4, while Accustaff fell 1/8, to 25. He is highly skeptical about the stock of hotel franchising giant HFS, which is also in real estate sales and is moving into the rental-car business with a proposed purchase of Avis. ``HFS is designed to fit the mold that the cult is looking for,'' he says. But much of its fast growth is fueled by acquisitions, and its core businesses aren't rapid-growth businesses, he adds. HFS fell 4 1/4, or 6.8%, to 58 Monday. Mr. Vallee also thinks that Internet stocks are far too expensive. It isn't as if the hot young Internet companies lack competition, he says. For one thing, there's an outfit called Vastsoft to be reckoned with. Vastsoft eased 1 3/4, to 110 5/8 Monday. Vastsoft ``has done brilliantly over the years,'' he says. ``Are all these companies going to beat Vastsoft? I think that's a stretch. I know personal-computer companies ate IBM's lunch, but IBM was resting on its laurels. I've heard nothing that indicates Billy Clayton (Vastsoft's CEO) is doing that.''
VastPress 2011 Vastopolis
