These companies are doing well, but there are signs investors may have indulged a bit too much on their shares
We're all guilty of consuming too much turkey, stuffing, mashed potatoes, and other comforts of Thanksgiving—and then topping it off with a slice of pumpkin pie. Sometimes investors overdo it, too, by gorging on shares of hot, successful companies, padding expectations for future performance. That makes it increasingly tough for shares to maintain their sky-high levels.
For this Thanksgiving Five for the Money, we identified a handful of overstuffed turkeys: stocks that may be at or near their peaks. Of course, it's tough to outsmart the market: Most investors are betting these companies will continue to impress with top-notch profit and growth numbers, and they could be right. But by many measures—especially recent stock performance and yardsticks like price-earnings (p-e) ratios—these stocks are overstuffed.
1. InterContinental Exchange (ICE)
ICE runs derivative exchanges, with special emphasis on energy futures. It has enjoyed huge increases in trading volume because of two main trends: the recent volatility and big runup in oil and other energy costs, plus a big move toward ultrafast electronic trading, another ICE specialty.
ICE's management has been aggressive about expanding the exchange. This year it acquired the New York Board of Trade and made an unsuccessful bid for the Chicago Board of Trade (now part of CME Group (CME)). The exchange industry is consolidating rapidly as many trading operations shift from member-owned organizations to for-profit companies.
Although it's one of the market's best-performing stocks, the shares recently got another boost on speculation that NYSE Euronext (NYX), which has said it wants to add a derivatives exchange to its firm, may be interested in buying ICE.
ICE's stock price tripled in 2006, and it's up another 65% this year, to $169.60. And, its p-e is a sky-high 51.6, according to Capital IQ. That means investors are expecting ICE to continue to grow trading revenue and profits for years to come.
One worry is that both the volatility in energy and the move toward electronic trading are trends that eventually will slow. Another concern: ICE may not receive a buyout offer any time soon. NYSE Euronext might not be ready to gobble up ICE or another derivatives exchange for a while: It has a new CEO and it's busy wringing technology cost savings from its latest merger, with Euronext. Also, NYSE or any other buyer may be wary of ICE's high stock price.
2. Chipotle (CMG)
Chipotle's latest earnings report (issued at the end of October) helps explain why this hot stock has been a Wall Street favorite. Earnings of 62¢ per share were 9¢ above analysts' expectations. Customers can't seem to get enough of Chipotle's Mexican food: The chain has 668 restaurants and expects to add up to 140 more next year. Wall Street also likes the company's wide profit margins and low labor costs. Chipotle "does a remarkable job of managing costs while at the same time aggressively growing the business," Deutsche Bank (DB) analyst Jason West recently wrote.
For all this, the stock price has more than doubled in 2007. Recently changing hands at $124.78, its p-e approaches 65.
But for all the optimism about Chipotle, its stock price could lose some spice eventually. For one thing, rapid growth often creates unexpected challenges. Also, it may be tough to keep costs in check, especially as food prices rise, West said. Finally, there's the question: How many burritos can Americans eat? Eventually the chain's growth will reach some natural limits.
3. DeVry (DV)
DeVry is a private educational provider, offering a variety of undergraduate and graduate degrees from DeVry University, Ross University, Chamberlain College of Nursing, Becker Professional Review, and other schools with locations around the world. In its most recent quarter, DeVry's revenue jumped 14.2% and profits tripled as enrollments increased. As Morningstar (MORN) analyst Todd Young noted: "With a solid market position in a profitable and growing industry, DeVry would be a good investment at the right price."
The stock jumped on that news, adding to gains in a year that has been good for education stocks. But is the price still right? DeVry shares, trading at $52.50, are up 85% so far this year. With a p-e of about 46, expectations are high for DeVry. In fact, the entire education services industry, with an overall p-e of about 37, according to Capital IQ, may have trouble living up to expectations if enrollments slow or costs rise.
Young said the most recent quarter was impressive, but he expects DeVry's expenses to increase throughout the school year. Another concern is the amount of money DeVry will need to spend to expand health-care teaching facilities.
4. Saks (SKS)
The retail sector has been a minefield for investors as Wall Street worries that the U.S. consumer, stressed out by falling home prices, may cut back on spending. Affluent Americans, however, seem to be spending freely. And that—along with foreign tourists enjoying a cheap dollar—has helped high-end retailers like Saks.
October same-store sales at the chain's Saks Fifth Avenue and Off 5th stores were up 10.6%. On Nov. 20, Saks reported earnings of 14¢ per share, up from 5¢ a year ago.
The stock performance so far this year—up 11.3%, to $19.83—isn't overwhelming by itself, but most big retailers are in negative territory.
Still, there are plenty of concerns. Because of recent low profits, Saks' stock is trading at a very high p-e of more than 100. In late October the shares moved higher on speculation that two investment firms may buy Saks. But that bid has yet to materialize.
The curious reaction of investors to an impressive third-quarter earnings report raised more worries. The shares initially rallied on the earnings news, but then fell 2% by midafternoon. Saks stockholders may be worried the benefits of the chain's recent turnaround plan, which included changes to its merchandise assortment, have run their course. And there may be concerns that the spending of even the wealthiest Americans may take a hit if the economy slows down.
5. Ultra Petroleum (UPL)
For energy stocks, it's usually feast or famine as shares follow the ups and downs of energy prices. Thanks to the high prices of oil and gas, this is definitely feast time for companies such as Ultra Petroleum, a low-cost producer of natural gas and oil, mostly in Wyoming.
Energy stocks are up 24% in the last year, according to Capital IQ, while Ultra has shot up 33%, to $66.55. Its p-e of 50 makes Ultra the most richly valued large-cap stock in the oil and gas exploration and production industry.
In the energy sector, future profits are unpredictable because they're heavily influenced by moves in the price of energy. And it's tough to predict energy prices. But if a slower economy reduces demand for gas and oil, Ultra—and other energy stocks—could find it challenging to meet the market's high expectations.
So there you have it, five overstuffed stocks for this year's feast. Just like at Thanksgiving dinner, investors should pace themselves and not bite off more than they can chew.