Can Ron DeSantis Take Down Donald Trump?
'The View's' Astounding Ignorance of Justice Clarence Thomas
What Is Going on in Katie Hobbs' Office?
The Press That Hates DeSantis Is Mad at DeSantis, and 'Terrorism' Is All...
Texas House Votes to Impeach Ken Paxton
DeSantis Suggests He Would 'Potentially' Pardon Trump Over J6 If Elected President
Philly DA: Murder Suspects Bragged About Crimes in YouTube Videos
Under Biden, DHS Is Targeting Conservative Groups
Oregon Republicans Continue Walkout Over Democrat's 'Anti-Parent Unconstitutional Agenda'
AOC Heckled and Shouted Off Stage by NYC Voters: 'Put America First'
Target Funneled Millions to Org That Wants to Secretly Transition Kids Without Parent's...
Memorial Day’s Enduring Importance
The Weed Industry Is High on DEI
A Demarcation Point
School Choice Success for Nebraska - Great for All Students

Do You Own One of the Most Expensive Stocks on the Market?

The opinions expressed by columnists are their own and do not necessarily represent the views of

"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, (NASDAQ: AMZN), Crown Castle (NYSE: CCI) and Host Hotels (NYSE: 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. (NYSE: CRM), Whole Foods Markets (NYSE: WFM) and Chipotle Mexican Grill (NYSE: 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, 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?

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.

[Note: If you haven't heard about this unique opportunity, then I want to tell you about it now. StreetAuthority has staked me with $100,000 of real money to invest in my absolute best ideas. For a limited time, you'll be able to follow along with me completely free. Go here to learn more.]

-- 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. 
This article originally appeared at

Join the conversation as a VIP Member


Trending on Townhall Video