In April of last year I decided that the boundaries of financial metrics no longer mattered to me, and I embarked on creating my own unique index, dubbed the TMFULOI, to examine and help me determine what the most overvalued companies in the market were.
Far from an exact science, the TMFULOI takes into account a company’s book value, price-to-sales, and price-to-cash flow ratio, allowing me to compare companies based on set parameters, which you can read more about here. Through the first two rounds of utilizing my index I was able to handily beat the S&P 500, my benchmark index, with the cumulative five stocks underperforming the S&P 500.
In my most recent instance using the TMFULOI, I added a growth discount parameter suggested by my Foolish colleague Rick Munarriz, who correctly pointed out that the initial TMFULOI valuation model I was using failed to account for, and even punished, rapidly growing companies. Having completed a third round using my newly adjusted TMFULOI value, I’m happy to say I have yet again surpassed the S&P 500 and am now a perfect three-for-three, despite LinkedIn Corp (NYSE:LNKD) being a thorn in my side once again!
| Company | Performance Since Feb. 19, 2013 | Performance Relative to S&P 500 |
|---|---|---|
| ARM Holdings plc (ADR) (NASDAQ:ARMH) | (16.4%) | (21.9%) |
| LinkedIn Corp (NYSE:LNKD) | 13.9% | 8.4% |
| Aspen Technology, Inc. (NASDAQ:AZPN) | (4.4%) | (9.9%) |
| SolarWinds Inc (NYSE:SWI) | (27.6%) | (33.1%) |
| Mercadolibre Inc (NASDAQ:MELI) | 27.9% | 22.4% |
Source: Yahoo! Finance.
All told, this grouping of the five most overvalued companies according to my valuation metric underperformed the S&P 500 by an average of 6.8%!
Now, it’s time for a new round of the market’s most overvalued companies. It’s been said that once is luck but three is a trend, so let’s see if I can make this four in a row for my adjusted valuation metric!
| Company | Price/ Book | Price/ Sales | Price/ Cash Flow | TMFULOI | Forward Sales Growth % | Adjusted TMFULOI |
|---|---|---|---|---|---|---|
| Regeneron Pharmaceuticals Inc (NASDAQ:REGN) | 16 | 16.8 | 270.3 | 303.1 | 27.1% | 11.18 |
| Qihoo 360 Technology Co Ltd (NYSE:QIHU) | 11.5 | 15.7 | 90.9 | 118.1 | 40.7% | 2.90 |
| Yandex NV (NASDAQ:YNDX) | 27.7 | 10 | 25 | 62.7 | 23.6% | 2.66 |
| LinkedIn Corp (NYSE:LNKD) | 20.4 | 18.8 | 67.6 | 106.8 | 41% | 2.60 |
| Tripadvisor Inc (NASDAQ:TRIP) | 10.9 | 10.8 | 34.6 | 56.3 | 22.3% | 2.52 |
| MercadoLibre | 15.9 | 12.2 | 31.6 | 59.7 | 25% | 2.39 |
Sources: Morningstar, Yahoo! Finance, Motley Fool CAPS Screener, author’s calculations.
Regeneron Pharmaceuticals Inc (NASDAQ:REGN)
Normally I exclude biotechnology companies from these rankings because they often skew the index, but Regeneron Pharmaceuticals Inc (NASDAQ:REGN) has been healthily profitable for some time now. Even though I made the company’s lead drug, Eylea (which treats wet age-related macular degeneration), my primary selection if I were to build a biotech dream team, the valuation here is getting out of hand according to my TMFULOI. The real concern would be Regeneron Pharmaceuticals Inc (NASDAQ:REGN)’s free cash flow, which is being directed, almost in its entirety, at additional research and development. With a growth rate of 27.1% in 2014, Regeneron Pharmaceuticals Inc (NASDAQ:REGN)’s forward P/E of 38 isn’t too horrific, but it’ll need Eylea sales to pretty much knock Wall Street off its feet in each and every quarter if it hopes to maintain this lofty valuation.
