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Expensive stocks often command premium valuations because the market thinks their business models are exceptional. However, the downside is that high expectations are already baked into their prices, leaving little room for error if they stumble even slightly.
Determining whether a company’s quality justifies its price causes headaches for nearly all investors, which is why we started StockStory - to help you separate the real opportunities from the speculative ones. Keeping that in mind, here are two high-flying stocks expanding their competitive advantages and one where the price is not right.
One High-Flying Stock to Sell:
Equifax (EFX)
Forward P/E Ratio: 34.9x
Holding detailed financial records on over 800 million consumers worldwide and dating back to 1899, Equifax (NYSE:EFX) is a global data analytics company that collects, analyzes, and sells consumer and business credit information to lenders, employers, and other businesses.
Why Are We Wary of EFX?
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Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 6.8 percentage points
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Performance over the past two years shows its incremental sales were less profitable, as its 4% annual earnings per share growth trailed its revenue gains
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Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
Equifax is trading at $276.98 per share, or 34.9x forward P/E. Check out our free in-depth research report to learn more about why EFX doesn’t pass our bar.
Two High-Flying Stocks to Buy:
Cloudflare (NET)
Forward P/S Ratio: 22.2x
Founded by two grad students of Harvard Business School, Cloudflare (NYSE:NET) is a software-as-a-service platform that helps improve the security, reliability, and loading times of internet applications.
Why Are We Backing NET?
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Billings have averaged 27.9% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
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Revenue outlook for the upcoming 12 months is outstanding and shows it’s on track to gain market share
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User-friendly software enables clients to ramp up spending quickly, leading to the speedy recovery of customer acquisition costs
Cloudflare’s stock price of $142.38 implies a valuation ratio of 22.2x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.
Netflix (NFLX)
Forward EV/EBITDA Ratio: 34.2x
Launched by Reed Hastings as a DVD mail rental company until its famous pivot to streaming in 2007, Netflix (NASDAQ: NFLX) is a pioneering streaming content platform.