Top Picks: Seven big-name stocks to avoid

Sometimes bad stocks happen to good companies.

That's not a moral judgment; it's merely a reminder that shares and the corporations that issue them are not the same thing. After all, the best company in the world isn't worth buying into if its stock is too expensive -- and likely to fall. The reverse also holds true: Just because a company's business is in the dumps doesn't mean its shares aren't oversold -- and poised for a pop.

That's why a stock that fetches $500 can be said to be "cheap," while a $5 stock can be said to be "expensive." It's not the face-value of equities that investors need to focus on -- it's the valuation and, of course, the fundamentals.
Take the market's massive rally off the March low, which has a lot of big-name shares looking pretty expensive relative to their projected earnings. Now we don't much advocate shorting securities (it's too risky), but after screening our way through scads of big-name stocks, we found seven that look way too pricey to start a new position -- or to add to a new one. If you already have these stocks in your portfolio, we'd say they are "holds," at best. And if you don't own them, don't bother getting in now.

Here, then, are seven big-name stocks to avoid.

Capital One
If you picked up Capital One (COF) at the March low you're sitting on gain of more than 360 percent right now. Unfortunately, it seems the easy money has been more than made. Despite burning up the equity markets over the last seven months, Capital One is still off about four percent on the year, lagging the S&P 500 ($INX) by about six percentage points. Of more concern is how pricey shares look. On a forward earnings basis the stock is nearly three times more expensive than the broader market, according to Thomson Reuters, and greater than four times more expensive relative to its own five-year average. That's not a compelling relative valuation, especially for a credit-card and banking company with so much exposure to consumer de-leveraging and interest-rate risk.

Too big to fail and too big to manage, Citigroup (C), once a pioneer of the supermarket approach to selling financial products and services, now looks more like a financial flea market. Echoing Capital One, shares have nearly quintupled since the March low, making them look far too expensive to bother with now. The stock is greater than three times more expensive than the broader market on a forward earnings basis. Meanwhile, return on equity (ROE) -- a measure of quality -- is negative. Take them together and you have what appears to be a very expensive, low-quality stock. Throw in the fact that analysts' average long-term "growth" rate is negative, and it's hard to like shares even at the current price of four bucks a pop.

The hotel giant may have done a decent job slashing costs and strengthening its balance sheet through the recession -- moves that could pay off handsomely once the economy improves -- but therein lies the rub with Marriott (MAR). A global economic downturn is simply hell on the lodging industry, as business people and consumers alike cut back on travel. That's been decimating the industry's key metric of revenue per average available room (RevPAR), which has dropped sharply for 15 consecutive months. Meanwhile, the stock trades at a 60 percent premium to the S&P and a 20 percent premium to its own five-year average. That's too rich for such a nascent -- and uncertain -- economic recovery.

For too long too much of Motorola's (MOT) fortunes have been tied to its handset business. That was great when the Razr was all the rage, propelling sales and market share to enviable levels. Now the company is looking to reverse its long post-Razr slide with hot new designs based on Google's (GOOG) Android operating system. Maybe that will work out for them, but this company has too much history as a two-trick pony for our taste. Except for the StarTac and Razr crazes, the company's market share tends to stay stubbornly, lamely the same. Throw in the fact that the stock trades at premiums of more than 100 percent to the market and nearly 45 percent to its own five-year average, and this is one call investors best not take.

In many ways Palm (PALM) looks a little too much like Motorola to like its fundamentals. The once dominant personal digital assistant and smartphone maker lost is mojo to Research in Motion's (RIMM) BlackBerry line and Apple's (AAPL) incomparable iPhone long ago. Palm, like Motorola, has it's own new well-received operating system; and shares, just like Moto's, look too pricey at these levels, as well. They're going for a 50 percent premium to the broader market, meaning investors are betting big on a Palm comeback, which may -- or may not -- materialize.

Sears Holdings
When billionaire hedge-fund macher Eddie Lampert's K-Mart bought Sears to create Sears Holdings (SHLD) five years ago, no one really believed that Eddie wanted to run a giant retail chain, despite his protestations. Trying to compete with Wal-Mart (WMT), Target (TGT) and Kohl's (KSS), to name just three, didn't make much sense. Rather, the deal had to be for the commercial real estate assets (ugly timing, there) and/or to use the entity in the same way Warren Buffett turned an old textile company into Berkshire Hathaway (BRK.A). Whatever Crazy Eddie's strategy, shares are too expensive to buy into it now. Sears's stock is three times more expensive than the market and nearly 30 percent greater than its own five-year average.

Perhaps Sony (SNE) never got the memo that conglomerates are soooo forty years ago. That would help explain this unholy combination of consumer electronics, movies, TV, music, insurance, banking and leasing businesses. The PlayStation 3? Awesome. Bravia HDTVs? Lovely. The remake of the "The Karate Kid?" Bring it on. But the stock? We wouldn't touch it with someone else's ten-foot pole. Shares currently trade at a 45 premium to the market while sporting negative ROE. That makes Sony look like an expensive, low-quality stock (with an incomprehensible business model, to boot).
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