5 Stocks You Can Sell Right Now: Baidu.com, Inc. (ADR) (BIDU) and More

Baidu (BIDU)Last April I introduced my own stock valuation formula, dubbed TMFULOI, because I was tired of living by Wall Street analysts’ rules. My formula, which you can read more about by clicking here, utilizes the Motley Fool CAPS Screener and data from Morningstar to take into account a company’s price-to-book, price-to-sales, and price-to-cash flow, to determine which companies are the most overvalued.

My very first experiment with the TMFULOI proved quite successful, with all five companies heading lower over the course of a two-month period and four of five underperforming the S&P 500. The second group of overvalued companies, unveiled last June, didn’t perform as well as the first group; however, it’s still quite evident that the TMFULOI appears to have some substance based on these results:

Company Performance Since
June 12, 2012
Performance Relative to S&P 500
LinkedIn (NYSE:LNKD) 72.2% 57.4%
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) (8.8%) (23.6%)
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) (20%) (34.8%)
Gold Resources (48.8%) (63.6%)
SolarWinds (NYSE:SWI) 21.6% 6.8%

Source: Yahoo! Finance, author’s calculations.

LinkedIn once again proved to be the primary thorn in my side, but overall, with the S&P 500 up 14.8% during the period, this group of companies underperformed the broad-based index by an average of 11.6% per company!

Therefore, the time has come once again to unveil the next group of overvalued companies according to my formula and see if I can make it three-for-three! As usual, I’ve excluded royalty trusts and clinical-stage biotechnology companies, as they’d significantly skew the results. In addition, I’ve got a new twist that I’ve added to the index that should help factor in growth prospects rather than penalize companies for their high ratios and give me/us a better understanding of just how overvalued these companies are.

The latest stock screen run on Motley Fool’s CAPS Screener turned up 19 companies, of which the six below qualified under the TMFULOI parameters:

Company Price/
Cash Flow
LinkedIn 21.1 21.7 82 124.8
11.3 23.8 64.5 99.6
Aspen Technology (OTCBB:AZPN)
26.9 10.4 21.7 59
SolarWinds (NYSE:SWI) 11.3 16.1 30.1 57.5
MercadoLibre (NASDAQ:MELI)
13.7 10.3 33.2 57.2
Tile Shop Holdings 18.1 13.1 15.9 47.1

Source: Morningstar, author’s calculations.

The aforementioned new twist, which comes from the suggestion of a flaw in the original TMFULOI formula by my Fool colleague Rick Munarriz back in June with regard to Baidu, is that I plan to divide the TMFULOI value by the forward year’s estimated revenue growth as determined by Wall Street to get a newly adjusted TMFULOI value that factors in growth.

Company Price/
Cash Flow
Growth %
ARM Holdings 11.3 23.8 64.5 99.6 19.6% 5.08
LinkedIn 21.1 21.7 82 124.8 38.9% 3.2
Aspen Technology 26.9 10.4 21.7 59 19.1% 3.09
SolarWinds 11.3 16.1 30.1 57.5 22.7% 2.55
MercadoLibre 13.7 10.3 33.2 57.2 22.4% 2.53
Tile Shop Holdings 18.1 13.1 15.9 47.1 24.1% 1.95

Sources: Morningstar, Yahoo! Finance, author’s calculations.

ARM Holdings plc (ADR) (NASDAQ:ARMH)

ARM Holdings produced the second-highest TMFULOI value, but, based on the recently added growth factor, is hands-down the most overvalued company out there according to my formula. ARM has been relying on its stable lead in mobile and tablet processing IP architecture over the past couple of years, but could be “priced to perfection” according to technology guru and Fool colleague Evan Niu. Evan noted in January that ARM’s royalty rate per unit has been on an almost precipitous decline since 2006. While this doesn’t put ARM in any danger of losing its IP superiority in mobile devices, it could continue to slow down its growth rate, which may spell disaster at such lofty valuation multiples.