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In late 2007, shares of networking giant Cisco Systems (NASDAQ: CSCO), widely regarded as a rock-solid technology company and a hot technology stock, peaked at just under $32 per share. Then, the stock promptly went on a prolonged slide that would see the share price slashed by more than half 18 months later.
This piece is not about Cisco, but the surprising path that Cisco’s stock took does serve as a reminder that stocks can be – and often are – overrated. Businesses and entire industries come in and out of favor, and companies that are flying high one day may become vulnerable to a new competitor a short while later. Or else they may remain an industry leader with a growing business, but they just cannot grow fast enough to justify the valuation to which they’ve ascended.
Stocks can be overrated for a variety of reasons.
They may just be too expensive. Or conversely, they may have suffered a steep price decline that suggests they’re at a bargain price, while really they are just in a freefall.
They may be doing just fine, but operating in an industry that’s slowly becoming extinct, which will invariably limit long-term prospects.
Or, they may just be like a small fish in a big pond, operating in an industry of the future, but just not good enough to ever dominate that industry.
Here’s my list of overrated stocks:
Alliance One International Inc. (NYSE: AOI)
This tobacco products manufacturer has had several turbulent years with its share price bouncing around quite a bit, but this year it’s been on a tear, rising more than 26% year-to-date. Results have been mixed recently, but the company seems to have picked up some momentum from the success of a recent restructuring.
Here’s the thing: You can’t cut your way to growth. It’s a quote more than one CEO has taken credit for, but if you think about it, it’s also sort of stating the obvious. While cost-cutting and reorganizing may be useful for improving efficiencies, it’s hard to revive a dying industry.
Yes, lots of people still smoke, but not nearly as many as just one generation ago. If tobacco stocks were once like gold in a portfolio, today they’re at risk of becoming something more like lead. Alliance One may have more ups and downs in the future, but it’s not a stock you want to gamble on.
Expedia Inc. (NASDAQ: EXPE)
The company that transformed the way we travel and became a major disruptor – enabling individuals and business people to plan trips without travel agents – has also been very good to shareholders. Over the past decade, Expedia’s shares have more than doubled and it is up about 27% year-to-date. (Prior to last week’s broad market selloff, it was up nearly 45% for the year.)
To be sure, Expedia has delivered strong revenue and earnings growth pretty consistently, while showing a staying power that’s not all that common among Internet startups. This Microsoft (NASDAQ: MSFT) spinoff was one of the first consumer dot-coms, and it remains a leading player today.
So why is it overrated? Quite simply, because it is going to be hard for it to sustain the rate of growth it’s enjoyed thus far. The online travel field is now flooded with competitors, and barriers to entry are pretty low. It’s entirely possible to book your whole trip today without visiting Expedia or any of its properties.
Nutrisystem Inc. (NASDAQ: NTRI)
Yes, dieting is a multi-billion dollar industry, but that doesn’t mean all stocks in the dieting and fitness sector are good buys. There are all sorts of different approaches to dieting, from buying Nutrisystem’s portion-controlled foods to counting “points” a la Weight Watchers International (NYSE: WTW).
But even without taking sides about which approach works best, you have to ask yourself why Nutrisystem stock sells at a price-earnings ratio of 32, while Weight Watchers’ is less than 5. Nutrisystem does make a popular weight loss product, but with a stock price that’s risen more than 40%so far this year, it’s looking a little … fat.
Worry-free riches
They’re owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%. Find out more right here.