Over short periods of time Wall Street is more of a popularity contest than anything else. That’s why emotions often drive stocks to unreasonable prices without any logic, which is the case today at Groupon Inc (NASDAQ:GRPN), Tesla Motors Inc (NASDAQ:TSLA), and LinkedIn Corp (NYSE:LNKD).
Emotions Rule the Day
It’s hard to look at the stock market’s performance since the turn of the century and not come away with a feeling that investors are illogical. The devastation of the tech bubble and the housing bubble in such close proximity to each other looks shocking in retrospect, but seemed normal when the bubbles were building.
While those two events represented poor decisions across the entire stock market, such overvaluations happen all the time on a stock by stock basis. Here are three stocks that investors should avoid today based on the market’s unrealistic expectations.
A Business Recovery?
Groupon Inc (NASDAQ:GRPN) was a star of the social Internet. The concept is pretty simple: pitch good deals to a list of customers who have said they want good deals. A first mover in the space, Groupon had a distinct advantage, but there were virtually no barriers to entry. At first that meant smaller competitors, but eventually retail giants like Amazon.com, Inc. (NASDAQ:AMZN) stepped in.
Although the top-line has continued to grow, it has become increasingly obvious that the deal model the company started out with isn’t enough to build a long-lasting business. It has begun to branch out into other areas, like helping companies liquidate excess inventory.
That’s Overstock.com, Inc. (NASDAQ:OSTK)‘s model. That company has vacillated between black and red ink for years and suffers with razor thin margins. It’s hard to suggest that a move in this direction will really help turn Groupon Inc (NASDAQ:GRPN) around over the long term.
The company came public in the mid-$20s and has traded lower since its IPO, recently sitting at around $8 a share. Only that’s up around 60% from the low at the start of the year. The biggest change is the company starting to shift into wholesale liquidation. Investors are best off avoiding Groupon Inc (NASDAQ:GRPN). It’s an exciting stock but lacks a solid long-term business model.
Making Money, Finally
Tesla Motors Inc (NASDAQ:TSLA) was co-founded by Elon Musk and makes only electric powered automobiles. Its first vehicle was a racy and expensive car meant to showcase the technology. Now it is starting to build cars for the masses. Only, the cars remain expensive, with price tags closing in on $100,000. A cheaper model was scratched because there weren’t enough orders.
The key that’s led to a nearly 200% stock price advance was that the company turned its first profit in the first quarter. That’s a huge milestone, but the company still faces big headwinds. For example, it is undertaking an effort to build recharging stations across the country so there is an infrastructure to support its vehicles. That’s an expensive proposition that could easily push the company back into the red.
On top of that expense, Tesla Motors Inc (NASDAQ:TSLA) recently stopped disclosing its sales backlog. The timing of that decision isn’t a good sign. It also makes an investment that much harder to justify since there is no clarity to future sales. A quarter or two of profitable performance isn’t a trend that supports the year-to-date price advance. Investors should stay away.
The Best Performer, but Overpriced
LinkedIn Corp (NYSE:LNKD) is another company that is way ahead of itself. The shares are up about 50% so far this year, and nearly 170% since the start of 2012. It is the dominant social network for the business set. That’s been a good business, with the company posting profits in each of the last three years. Moreover, it isn’t as reliant on advertising revenues as are the non-business social networks like Facebook Inc (NASDAQ:FB).
To put that strength in perspective, LinkedIn Corp (NYSE:LNKD) earned 20% of revenue from subscriptions, 57% from job search tools, and just 23% from advertising in the first quarter. Nearly 85% of Facebook’s revenue was from advertising. There’s no question that LinkedIn has a great model and notable brand recognition. But it also has a trailing price to earnings ratio of around 500 and a forward P/E of around 90.
Those are heady numbers that require virtually everything to go right to justify. This is a good company that’s just too expensive right now. Investors should stay away.
Bad Votes
Wall Street usually gets pricing right over the long term, but that can require often painful short-term ups and downs. Groupon Inc (NASDAQ:GRPN)’s advance is based on rosy views of a business shift that is uncertain at best. Tesla Motors Inc (NASDAQ:TSLA) has great technology, but there’s still a long way to go before it’s mainstream enough to support the company’s price tag. LinkedIn Corp (NYSE:LNKD), meanwhile, has a good business model, but investors are stampeding in, sending the shares to likely unsustainable highs.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends LinkedIn and Tesla Motors (NASDAQ:TSLA) . The Motley Fool owns shares of LinkedIn and Tesla Motors.
The article A Trio That’s Moved Too Far Too Fast originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
