Cerus Corporation (CERS), Foster Wheeler AG (FWLT): Three Post-Earnings Market Movers that I Would Not Touch

Great Growth But Too Expensive

Splunk Inc (NASDAQ:SPLK), a machine data analytics leader, rallied almost 8% on Friday after beating on both the top and bottom line. The company posted an EPS of $0.03 and revenue of $65.2 million, a 51% yoy gain. The company’s 2013 guidance of $260 million-$270 million is also above the consensus of $263.2 million; that is if the company’s revenue is near the top end of guidance.

If Splunk achieves revenue in the middle of its guidance then growth for 2013 would be approximately 50% compared to the last 12 months. This is a company that has grown incredibly over the last four years, doubling in size during each of these four years. Now, growth is slowing to 50%, the company is still unprofitable, and it’s trading with a ridiculous price/sales ratio of 20.14. Therefore, the stock is trading at 15 times next year’s sales, with a forward P/E ratio of 389.70.

Now, I am not saying that the stock will not rise from this point. However because of its valuation the upside is limited. As a result, retail investors might be better served finding other companies with 50% growth, or greater, that are trading with much more attractive margins (ie Sodastream International Ltd (NASDAQ:SODA), XPO Logistics Inc (NYSE:XPO), Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ)).

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino), with one scenario being earnings. For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain.

Investors need to avoid this behavior after earnings, and look not at the performance of the stock but rather the performance of the quarter. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns.

The article Three Post-Earnings Market Movers that I Would Not Touch originally appeared on Fool.com and is written by Brian Nichols.

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