Five well-known stocks commonly found in individual investors' portfolios are overvalued and pose huge downside risk, according to research for USA TODAY released today by a valuation firm.
Online media company AOL, donut and ice cream chain Dunkin Brands, professional social networking site LinkedIn, game maker Electronic Arts and land manager Alico rank as the "most dangerous" stocks tracked by New Constructs.
New Constructs is an online service that uses discounted cash flow analysis to see how much a stock is worth today, based on how much cash it's projected to bring in the future.
Investors are especially sensitive to what stocks they might own that might be subject to a correction. Following the market's powerful run in 2013, investors are on edge over when a market pullback might be coming. The fears of turbulence in the stock market were fanned this week as Janet Yellen of the Federal Reserve gave guidance about the direction of raising interest rates.
Each of these stocks presents unique dangers to investors, according to New Constructs, including:
• AOL. Investors are betting on big growth from this company, still transforming from a subscription-based business to an ad driven one. The average Wall Street analyst rates the stock an "outperform" and sees long-term growth of 14%, says S&P Capital IQ. Such bullishness has pushed the company's P-E up to a lofty 38 times earnings over the past 12 months as the stock has rocketed 140% over the past two years. But the company's strategy of cutting costs to maintain profitability isn't sustainable, New Constructs says.
• Dunkin' Brands. The company, which owns Dunkin' Donuts and the Baskin Robbins brands, is dazzling investors with strong reported earnings growth. The company reported robust 36% net income growth in 2013, helping drive the stock higher. Shares of Dunkin' Donuts are up 41% the last two years. But during 2013, the company's cash from operations fell 8% in 2013. The company's profit relative to what investors have invested in the company is 7%, below rivals including McDonald's, New Constructs says.
• LinkedIn. The site for professionals to connect with each other online was a darling in 2013, with its stock soaring 88%. But it's been a different story this year, with the stock declining 6.9%. Profit growth was just 23.9% in 2013, down dramatically from 2012 when net income rose 81.4%. Meanwhile, the company is only generating four cents of profit from every dollar invested in the business, which is low and falling, New Constructs says.
• Electronic Arts. Defying critics who say that the future of video games are 99-cent apps sold on phones, shares of EA are up 32% this year. So far, the company top title, Titanfall for the Xbox One, appears to be selling well. But at $30 a share, the company's stock have already hit analysts' 12-month price target of $30.53, says S&P Capital IQ. At its current price, EA's shares are priced for more than 20% net operating profit after taxes for 20 years, a pace difficult to maintain, New Constructs says.
• Alico. The land management business is the least-known company on the list and it's a relatively small company with a market value of $282.4 million. At the current stock price, which is 15.6 times earnings over the past twelve months, investors are betting the company's profit after taxes will grow 22% a year for 10 years, says New Constructs. That growth baked into the price is well above the 8% long-term growth expected by analysts, says S&P Capital IQ.