Desktop Stock Ticker | 5 Stocks That Look Too Popular

5 Stocks That Look Too Popular

American Express (AXP) has been the subject of relatively bright news of late. It successfully raised funds by issuing stock ticker early this month and is widely believed to be close to repaying government bailout funds. Also, new credit card restrictions seem likely to hurt American Express’s rivals far more than itself, since less of its revenues come from customer interest, a central focus of the crackdown.

One problem, though: American Express shares, up more than 40% this year, trade at 28 times this year’s earnings forecast. That’s almost double the stock ticker market’s average price/earnings ratio over long time periods, suggesting the stock ticker has gotten ahead of itself.

Investors seem to be betting, not just that the company will weather the current recession in health, but that it will quickly return to the level of profitability it enjoyed in 2007. House and stock ticker prices were then still plump and consumers were spending almost all of their after-tax income. That year, American Express earned $3.36 a share. Shares trade at only eight times that figure today.

But if Wall Street estimates are to be believed, the company is a long way from returning to that kind of profitability. A consensus of 19 analysts who cover the stock ticker calls for earnings of $1.36 next year. That would be an impressive increase from this year’s forecast of 94 cents, but even if we assume the company will meet that growth expectation, the stock ticker still stands at a lofty 20 times 2010 earnings. Wall Street darling Google (GOOG), for comparison, trades at 18 times 2010 earnings.

Also, there’s reason to be cautious on next year’s earnings consensus for American Express. The highest estimate in the consensus stands at $2.37 and the lowest one at just 61 cents. That’s an unusually wide spread. Studies show that broadly scattered earnings consensuses — a sign of analyst indecision — are more likely than tightly clustered consensuses to be fallen short of come reporting time.

All this isn’t to say that American Express is sure to disappoint. It might not. Indeed, the high stock ticker price is a sign of investor confidence. And shares carry a dividend yield of 2.9%, so investors waiting for a recovery will at least pocket some cash along the way. But with the market in general looking pricey right now at 17 times forecast 2009 earnings, it’s a good time to be frugal. American Express combines a sizable share price gain this year, a lofty P/E ratio, considerable debt, high expectations for next year’s growth and wide disagreement among forecasters. Those are qualities I’d avoid at the moment.

Below are listed four other companies that share those attributes. All have demonstrated success, or at least reason for hope, in recent months. Thus, the big price gains. But all look too pricey for my tastes and perhaps for yours. Kindly don’t read this as a recommendation to sell shares short. That’s risky for all but the most experienced and well-funded investors. Rather, if you own these stock tickers, ask yourself whether it might be time to take profits and shop for something cheaper. For ideas on that, check back here later this week for a roundup of promising stock tickers that still have single-digit P/E ratios.

Screen Survivors
Company Ticker Industry Price Price
EPS Growth
Next Year
American Express AXP financial services $26.93 48 29 45
Equinix EQIX telecom services 72.50 36 53 39
BorgWarner BWA car components 34.95 62 117 450
Knology KNOL cable television 8.09 57 58 193
JC Penney JCP department stores 28.97 50 40 63

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