These 4 Companies Could Be Overvalued

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is a fool’s game to guess when the market top will occur, but not so for when it comes to individual companies. A high P/E could be a starting place to identify overvalued companies. Yet, the stock price highs from Amazon.com (AMZN) and Salesforce.com (NYSE: CRM) show that P/E is not a great metric to use when markets are rising.

Investors should look closely at companies that are:

1)      Offering secondary shares

2)      Experiencing rising insider selling

Michael Kors (NYSE: KORS) is an example of a company which could be at a top. The company is filing a shelf offering of 25 million shares. Shares may be at a peak, closing recently near $65 and up 82.65% from a 52-week low. Short float is low, at just 3.59%. The company was recently added on Citigroup’s Top Picks list. Citi cites rising comparable-store sales and earnings as reasons to own the stock.

When Michael Kors reported earnings, the company said store sales increased 41.4%. A conversion to shop-in-shops at departments also contributed to the higher store sales.

Notice the sellers participating in the 25 million share offering. Sportswear Holdings, a private-equity firm based in Hong Kong, represents 80% of the sale. Michael Kors himself is selling 3 million shares. This will reduce his position to 2.4%, down from 3.9%.

Oncolytics Biotech (NASDAQ: ONCY) is issuing shares, using the funds to pay for clinical trials, manufacturing, and for general operational costs. The biotech firm has a market cap of $358.24M, with a short float of 9.10%. Shares are up 192% from a 52-week low. A bullish view for this company is available here.

Oncolytics reported strong results earlier in February 2012, which pushed shares up. A clinical trial that treats Squamous Cell Carcinoma of the lung received positive results. Reolysin was the lead product where 95% of the patients exhibited tumor shrinkage.

When the issue closed, shares declined 1.5%, slightly below the $4 offering price.

Breitburn Energy Partners (NASDAQ: BBEP) plans to issue 13 million shares. After the company announced the issue on February 6, shares dropped nearly 6% after-hours. The company has a healthy cash flow, pays a dividend of around 9.6%, but said it will use the share sale to pay down its debt.

Breitburn dipped from $21.1 to around $19.50 after the secondary offering was announced. In recent days, investment firms rallied around MLPs, citing total return from capital appreciation, along with cash distributions, as reasons to buy companies like Breitburn.

Company

52-WK Low/High

Mkt. Cap. 

Avg. Vol

Breitburn Energy Partners

16.06

21.75

1.59B

777,466

Salesforce.com

120.18

178.91

24.83B

1,646,550

Michael Kors Holdings

35.5

65.1

12.94B

4,000,230

Oncolytics Biotech

1.6

5.29

358.16M

516,552

 

 

Source: Yahoo Finance

Insider Sales

Insider sales activity at Salesforce.com (CRM) continued steadily, and even rose as the company announced a share split. Shares are over 45% above their 52-week low, with short float at around 10%. The company expanded its software offering by acquiring EntropySoft. This company helps companies integrate their apps with content management software. In the cloud space, whispers of a DropBox IPO are supporting the high share price of Salesforce.com despite insider sales activity.

Investors could be confident with holding Salesforce.com at its current valuation, since social networking is hot right now. Salesforce.com posted on its blog that it is launching a social ad platform for twitter. A Twitter IPO could even justify a higher price for Salesforce.

Analysis and Conclusions

Management is clearly taking advantage of its high share price, when issuing shares. Michael Kors and Breitburn, by offering a secondary share sale, signal that their shares are at a peak valuation. The share issue will improve the balance sheet and provide cash for further growth, but existing shareholders will be diluted. Oncolyics Biotech is inherently volatile. The company reported positive clinical trial results for its lead product candidate that helps shrink tumors. Profit-taking could continue after the company rallied over 30% after the clinical results.


chrispycrunch has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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