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Yelp Inc (YELP): Insanely Overvalued After 217% Gain In 2013

When it comes to stocks, there is an almost never-ending list of technical and fundamental information for investors and analysts to pour over. For some investors that means looking at charts, while others take a more fundamental approach and look at financial statements.

But even though there is a massive universe of information for investors to sift through, there is only one single piece of information I analyze every single time I look at a stock or company no matter what sector it comes from. And that is valuation.

Without question, valuation is the single most important factor effecting a company’s share price. That’s because valuation is merely a reflection of earnings, and without earnings and earnings growth, a stock has little long-term potential.

History is littered with examples of overvalued stocks crashing and leaving investors with big losses.

Take Netflix, Inc. (NFLX) in 2011. After the company surged to $300 on little earnings growth, shares crashed to $50 in the next year, delivering crushing losses to investors unaware of how prices on the chart had gotten ahead of earnings: another way of saying shares had become grossly overvalued.

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And now, I have found another stock that is on the same path. Shares have been surging in 2013 while the company continues to lose money. But even if the company did turn profitable, shares would still be insanely overvalued.

I’m talking about Yelp, Inc. (YELP). Make no doubt about it, Yelp is a great company, providing millions of people with valuable consumer information. But there is a big difference between a great company and stock. And right now, this is a stock that is insanely overvalued.

Since going public in the spring of 2012, shares are up 154%. But things got even more bullish in 2013, with shares up 217% on the year, currently trading at an all-time high just above $61.

But in the meantime, there has been very little happening on the earnings front. In the last 3 months, the current-year estimate has risen from a loss of 14 cents to a loss of 10 cents. At the same time, the 2014 estimate has increased from 19 to 24 cents.

Even if Yelp knocks the cover off the ball and delivers 30 cents of earnings in 2014, its current share price of $62 would equate to a forward P/E of 258X. To put that into perspective, the SP 500’s forward P/E is 16, which has Yelp trading at a 1,600% premium to the overall market. How about this: If apple had a forward P/E of 258, shares would be trading at $16,000.

Yelp earnings are definitely headed in the right direction. But it also makes its stock one of the most overvalued in the entire market and a huge danger to investors looking to jump in on the recent wave of bullish momentum.

The Takeaway

Yelp is a great company. But there is a big difference between a great company and a great stock. And right now, Yelp is one of the most overvalued stocks in the entire market. That leaves recent investors vulnerable to a big pullback as shares trade ahead of earnings growth.

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Mystic Maggie

All of the Mystic Maggie Posts are RSS Reader Feeds from around the web. All copyright remains with the original publisher. No copyright is claimed or intended. Where supplied, links back to the original article are included.

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