I don’t short.

I like to copy Buffett in that regard.

Charlie and I (Buffett) have both talked about it. We probably had a hundred ideas of things that would be good short sales.  Probably 95 percent of them at least turned out to be, and I don’t think we would have made a dime out of it if we had been engaged in the activity.  It’s too difficult. The whole thing about ‘longs’ is, if you know you’re right, you can just keep buying, and the lower it goes, the better you like it, and you can’t do that with shorts. – Warren Buffett

The richest investor in the world got to where he is not having shorted a thing.

But with less to buy in the market, I want to turn my attention to see what was expensive.

Not to short or tell people to short, but just to see what was out there.

It seems like Goldman Sachs Group Inc (NYSE:GS) regularly releases a list of stocks with the most downside based on their valuations.

But since most of the stocks on their list is only overpriced by 15% or so, I figured I’ll give you my version of what overpriced is.

Searching for Overpriced Stocks

I started out by being lazy and looking up stock with a PE greater than 100.

Then I realized that some of these listed companies may have crazy valuations, but some of them had real legs to run.

So my search is based on a mix of unrealistic EV/EBITDA and negative ROE.

Fundamental numbers, valuation metrics, intrinsic value targets and certain charts come from the Old School Value Stock Analyzer.

Zillow Inc (NASDAQ:Z)

Real estate information website and app.

Recent Price: $73.48

What It’s Worth: No more than $20 (even with extreme growth assumptions)

Downside: 80%

Why I Don’t Like it and Why It’s Overpriced

Regular share dilution by issuing shares.

Another round of share issuance was completed in the third quarter of 2013. Latest share count shows 39m shares outstanding compared to 30m in 2012. That’s a 30% increase of shares.

Insiders consistently exercise options.

Zero open market purchases. If insiders are unwilling to buy, it shows that the expectations baked into the current stock price is too expensive for the insiders.

Zillow insider transaction Stocks

No proven operational history.

I get that Zillow Inc (NASDAQ:Z) is a growth stock, but is growth far more important than running the operations properly? The revenue growth is slowing down. Sales in the TTM is 49% higher than the previous year. A big drop from the 120% and 77% from first two year of being pubic.

High growth of intangibles.

A lot of acquisitions are being made to increase the offering. Zillow Inc (NASDAQ:Z) used to be a real estate pricing company, but with the web 2.0 revolution, it is offering more services and reaching into different markets to continue growth. Intangibles have gone from $76m in 2012 to $124m in the TTM.

Core business is unstable.

I am no real estate expert but from a business point of view, when a growth company, still in its early stages has to continue acquiring companies, there is no core strategy. It’s management trying new things and trying to expand into different markets to see what works.

Fundamentals are Through the Roof.

Call me blind or stupid, but I have no idea how to interpret these numbers to see Zillow Inc (NASDAQ:Z)’s upside.

Zillow upside Stocks

Black Diamond Inc (NASDAQ:BDE)

Black diamond Stocks

Makes outdoor products and apparel. Think of Columbia Sportswear and The NorthFace.

Recent Price: $13.20

What It’s Worth: $7 max, and that’s because I’m nice.

Downside: 52%

Why I Don’t Like it and Why It’s Overpriced

Horrible business execution.

I don’t see a single shred of competitive advantage.

Margins have dropped considerably, the company is showing losses, it is losing money, and ROIC is negative.

Share Dilution.

A common issue with overpriced stocks is that shares are diluted constantly.

Black diamond share dilution Stocks

Black Diamond Inc (NASDAQ:BDE) Share Dilution

Share count has gone from 16.9m in 2009 to 32.4m TTM.

That’s a dilution of greater than 100% in 4 years.

Compare that to a company like Peerless Systems Corp. (NASDAQ:PRLS) that has bought so much of it’s own shares that there will be nothing left soon.

Peerless system Stocks

Peerless Systems Corp. (NASDAQ:PRLS) Buys Back Shares Like Crazy

Slow Moving Inventory

Slow moving inventory isn’t necessarily a bad thing, but if it takes 1.5x to 2x longer to clear the inventory compared to competitors, there is a serious operating deficiency.

On the bright side, it shows that there is room for improvement and the stock could benefit, but margins are razor thin, and there is no room for mistakes for a small outdoors specialty retailer like Black Diamond.

Low Piostroski Score.

Black Diamond Inc (NASDAQ:BDE) scores a 3 in the TTM vs a pathetic score of 2 in 2012.

Piotroski F Scores Stocks

A Lowly Piotroski Score

The three points come from

  • positive operating cash flow in the TTM
  • cash flow from operations greater than ROA
  • asset turnover is higher than in 2012

Yelp Inc (NYSE:YELP)

Online business review website and app.

Recent Price: $63

What It’s Worth: $10 even with crazy optimistic assumptions. See below.

EBIT Multiple Valuation method Stocks

Fundamentals are missing in the stock price

Playing around with the EBIT calculator, to even justify the current stock price, the normalized revenue has to be in the $1b range with 20% margins and an EBIT multiple of 20.

F.Y.I. revenue for the TTM is just $203.5m so you can see I am being generous.

Downside: 81%

Why I Don’t Like it and Why It’s Overpriced

There are no fundamentals.

The obvious thing to me is that Yelp does not trade on fundamentals. Recall when I wrote about Tesla Motors Inc (NASDAQ:TSLA).

Stock price = fundamentals + emotions

That’s what I’m seeing with Yelp Inc (NYSE:YELP) at the moment.

If you were offered the chance to buy out a private business with Yelp’s numbers, what would you do?

I’d slap the seller in the face.

The numbers look worse than a non-profit company.

  • no profit
  • negative margins
  • share dilution
  • negative flow from operations
  • negative ROE (but surprisingly positive CROIC)

Relentless Insider Selling

It’s always been

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