LinkedIn Corp (LNKD), Regeneron Pharmaceuticals Inc (REGN): 5 Stocks You Can Sell Right Now

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!

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!

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.

Qihoo 360 Technology Co Ltd (NYSE:QIHU)
As you’ll see with many of the companies on this list, few are having any issues with rapid growth. Qihoo, a China-based Web and mobile browsing company, delivered a 59% increase in revenue in the first quarter. Furthermore, Qihoo’s product penetration rate and browser penetration rate stood at 95.8% and 69.6%, respectively. While investors see this as a sign of Internet security dominance, I see it as a sign that little growth potential remains. The downside of big market penetration is that slower growth is likely around the corner, and it tends to attract the attention of bigger companies that want a piece of the action. Add that to the political unpredictability of China and Qihoo’s 91 times cash flow, and I have all the reasons I need to keep my distance.

LinkedIn
My nightmare hath returned for a fourth go-round! In all three instances previously, I’ve harped on LinkedIn Corp (NYSE:LNKD)’s valuation and slowing growth, and it’s proven me wrong in each instance. That’s bad news for me but great news for my Foolish colleagues who’ve correctly called LinkedIn’s upside. Unfortunately, the primary culprit, its valuation, is still what causes me to distrust the stock here. LinkedIn Corp (NYSE:LNKD) is largely dependent on the jobs market and a growing economy for its business to thrive. The end of QE3 could put a serious crimp on lending and trickle its way throughout the economy all the way down to the jobs market, where it could cause hiring to stall. With so many economic questions, I can’t justify paying 68 times forward earnings for a company so intricately tied to the fate of the jobs market.

Tripadvisor Inc (NASDAQ:TRIP)
Last, but certainly not least, is online travel media review, information, and planning provider TripAdvisor. Working in the company’s favor is the fact that few people are willing to give up their vacations even if consumer spending is tightening. However, that view is based on continued growth in China, whose demand has at least partially propped up a fragile U.S. economy. With China’s potential credit crunch threatening to slow its GDP growth even further, Europe installing austerity measures across numerous countries, and the Federal Reserve ready to pull the plug on QE3 in the U.S., we could be looking at a serious global slowdown. That’s bad news for TripAdvisor, which generates 78% of its revenue from ads, which are growth driven.

Foolish roundup
There you have it: the fourth installment of my overvaluation index! Will I go four-for-four? Only time will tell, but, as always, I highly doubt these valuations can hold up against the S&P 500.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article.

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