I think the logical continuation of my article how to tell if a stock is undervalued, is another one telling my readers how to tell if a stock is overvalued.
There are many signs to tell if a stock is overpriced, here are the top 10:

1. Company is making money, but not enough to justify its current stock price: Take a look at LNKD for example. LinkedIn as a company has two revenue sources: Google advertisements and its subscription plans. Both of these revenue sources generate at best a few million dollars a month (of course, that’s raw revenue, net revenue is much less than that), and are not enough to justify its astronomical price to earnings ratio of about 1,200.
2. Company cannot sustain growth without unsustainable marketing budgets: GRPN is a great example. Groupon, as a website, will lose much (if not all) of its growth without advertising. In addition, every investor who knows a thing or two about Groupon knows that it’s spending much more than it can for acquiring new subscribers. At one point Groupon has to either reduce or completely stop its advertisement to be able to balance its budget, and when that happens, then Groupon as a business will cease to grow, and investors will flee. Groupon is yet to make a net profit.
3. Company has never made a profit before: When you invest in a company that has never made a profit, then you are really gambling. A company should make a profit before going public. In the good old days, going public was meant to expand the business in order to make more money. Bankrupt companies or companies that were not making money were not trusted by investors and didn’t bother to go public in the first place. Nowadays, it seems to me that stocks exchanges prohibit profitable companies to get listed (when was the last time you saw a profitable company going for an IPO), and only allow companies that are barely making money (but not profitable) to be listed.
4. Going public is the end to a means and not the means to an end for the company: I dare you to take an honest look at the IPOs in the past couple of years, and tell me which one of these IPOs you really think existed for the long term benefit for the company, and not for the short term benefit of its major stockholders. When you invest in such IPOs, then we both know that you know that you are investing in an overpriced stock. But the question is, do you actually care?
5. The company has lost its competitiveness: Let’s look at RIM. A few years ago RIM was the top smartphone producer in the world, and then Apple came, and stole the show, and then Android came, and stole the show, and then the Windows Phone came … (forget about the Windows Phone, Microsoft didn’t pay me yet to say nice things about it, but apparently they paid everyone else – don’t you think it’s ironic to read all these positive reviews about the Windows Phone by the same people that were bashing it a few weeks ago) In any case, the point is that RIM lost its competitiveness, and the moment a company loses its competitiveness, then investors should jump ship!
6. The company is no longer innovative: Microsoft is one of the oldest and most respectable companies in the technology sector, and it will remain so for a long time. But, when was the last time that you saw a Microsoft product and you said WOW!? The last time I said Wow was back in 1996, when I used Encarta for the first time. Does that mean that MSFT is overpriced? Well, I’ll let you draw conclusions by yourself, but think of a scenario where everyone is using phones and tablets instead of PCs and where free Android is the #1 operating system. It might happen…soon…
7. The company is doing its best to lose customers: How can you make your customers hate you and desert you? Ask Netflix, they are artists at doing so. I have been warning about Netflix since almost the beginning of this blog, but I’m not sure if anyone listened. The first time Netflix (mis)treated its customers as cash cows, it got away with it, not only that, its stock skyrocketed to just over $300 (investors thought that the company will now make more money). The second time it did that, well, we all know what happened. As we all know, fool me once, shame on you, fool me twice, shame on me! Investors long on NFLX should have picked the signals when they hiked/modified their subscription rate the first time.
8. The company is no longer able to meet expectations: I’ve discussed last month how it’s now the beginning of the end for Apple, one of the reasons that I have mentioned proving that Apple’s demise is nigh is that it’s no longer able to meet expectations. People are just expecting too much from Apple in terms of innovation to the point that any product that Apple will release now, no matter how innovative it is, will be considered as ordinary. This has forced Apple to rename the iPhone 5 to iPhone 4S. So, does that mean that AAPL is overpriced? You bet!
9. The company is consistently missing estimates: I’m always amazed on how the stock market punishes a company for missing one estimate, and yet turns a blind eye on a company that consistently misses estimates. Get away from a stock that is like that, it’s probably a pump and dump scheme.

And, last but certainly not least:

10. The company is not a real business: There are many (Chinese?) companies that are listed in the American stock markets which are not real businesses, they are easy to spot if you look closely. The stocks issued by such companies are not only overpriced, but they’re literally junk (and not junk like bond junk, but real junk). They’re not even worth 1 cent!

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