In April of last year I decided that the boundaries of financial metrics no longer mattered to me, and I embarked on creating my own unique index, dubbed the TMFULOI, to examine and help me determine what the most overvalued companies in the market were.

Far from an exact science, the TMFULOI takes into account a company's book value, price-to-sales, and price-to-cash flow ratio, allowing me to compare companies based on set parameters, which you can read more about here. Through the first two rounds of utilizing my index I was able to handily beat the S&P 500, my benchmark index, with the cumulative five stocks underperforming the S&P 500.

In my most recent instance using the TMFULOI, I added a growth discount parameter suggested by my Foolish colleague Rick Munarriz, who correctly pointed out that the initial TMFULOI valuation model I was using failed to account for, and even punished, rapidly growing companies. Having completed a third round using my newly adjusted TMFULOI value, I'm happy to say I have yet again surpassed the S&P 500 and am now a perfect three-for-three, despite LinkedIn being a thorn in my side once again!

Company

Performance Since Feb. 19, 2013

Performance Relative to S&P 500

ARM Holdings

(16.4%)

(21.9%)

LinkedIn

13.9%

8.4%

Aspen Technologies

(4.4%)

(9.9%)

SolarWinds

(27.6%)

(33.1%)

MercadoLibre

27.9%

22.4%


Source: Yahoo! Finance.

All told, this grouping of the five most overvalued companies according to my valuation metric underperformed the S&P 500 by an average of 6.8%!

Now, it's time for a new round of the market's most overvalued companies. It's been said that once is luck but three is a trend, so let's see if I can make this four in a row for my adjusted valuation metric!

Company

Price/ Book

Price/ Sales

Price/ Cash Flow

TMFULOI

Forward Sales Growth %

Adjusted TMFULOI

Regeneron 
Pharmaceuticals 

16

16.8

270.3

303.1

27.1%

11.18

Qihoo 360 
Technology

11.5

15.7

90.9

118.1

40.7%

2.90

Yandex

27.7

10

25

62.7

23.6%

2.66

LinkedIn

20.4

18.8

67.6

106.8

41%

2.60

TripAdvisor

10.9

10.8

34.6

56.3

22.3%

2.52

MercadoLibre

15.9

12.2

31.6

59.7

25%

2.39

Sources: Morningstar, Yahoo! Finance, Motley Fool CAPS Screener, author's calculations.

Regeneron Pharmaceuticals
Normally I exclude biotechnology companies from these rankings because they often skew the index, but Regeneron has been healthily profitable for some time now. Even though I made the company's lead drug, Eylea (which treats wet age-related macular degeneration), my primary selection if I were to build a biotech dream team, the valuation here is getting out of hand according to my TMFULOI. The real concern would be Regeneron's free cash flow, which is being directed, almost in its entirety, at additional research and development. With a growth rate of 27.1% in 2014, Regeneron's forward P/E of 38 isn't too horrific, but it'll need Eylea sales to pretty much knock Wall Street off its feet in each and every quarter if it hopes to maintain this lofty valuation.

Qihoo 360 Technology
As you'll see with many of the companies on this list, few are having any issues with rapid growth. Qihoo, a China-based Web and mobile browsing company, delivered a 59% increase in revenue in the first quarter. Furthermore, Qihoo's product penetration rate and browser penetration rate stood at 95.8% and 69.6%, respectively. While investors see this as a sign of Internet security dominance, I see it as a sign that little growth potential remains. The downside of big market penetration is that slower growth is likely around the corner, and it tends to attract the attention of bigger companies that want a piece of the action. Add that to the political unpredictability of China and Qihoo's 91 times cash flow, and I have all the reasons I need to keep my distance.

Yandex
Overseas search engines seem to be a popular theme here, with Russia's largest search engine, Yandex, coming in with the third-highest adjusted TMFULOI score. Like Qihoo, its growth has been impressive, with Yandex reporting revenue growth of 36% as profits leapt 79% from the year-ago period in the first quarter. But, Yandex has its own set of unique problems to contend with, including the highly volatile Russian ruble, which can negatively impact its results, as well as the potential for increasing competition and high costs to expand its operations. The potential is certainly there for Yandex to keep growing, but it appears Russia's infrastructure still has a long way to go before Yandex will realize its true potential.

Source: Sheila Scarborough, Flickr.

LinkedIn
My nightmare hath returned for a fourth go-round! In all three instances previously, I've harped on LinkedIn's valuation and slowing growth, and it's proven me wrong in each instance. That's bad news for me but great news for my Foolish colleagues who've correctly called LinkedIn's upside. Unfortunately, the primary culprit, its valuation, is still what causes me to distrust the stock here. LinkedIn is largely dependent on the jobs market and a growing economy for its business to thrive. The end of QE3 could put a serious crimp on lending and trickle its way throughout the economy all the way down to the jobs market, where it could cause hiring to stall. With so many economic questions, I can't justify paying 68 times forward earnings for a company so intricately tied to the fate of the jobs market.

TripAdvisor
Last, but certainly not least, is online travel media review, information, and planning provider TripAdvisor. Working in the company's favor is the fact that few people are willing to give up their vacations even if consumer spending is tightening. However, that view is based on continued growth in China, whose demand has at least partially propped up a fragile U.S. economy. With China's potential credit crunch threatening to slow its GDP growth even further, Europe installing austerity measures across numerous countries, and the Federal Reserve ready to pull the plug on QE3 in the U.S., we could be looking at a serious global slowdown. That's bad news for TripAdvisor, which generates 78% of its revenue from ads, which are growth driven.

Foolish roundup
There you have it: the fourth installment of my overvaluation index! Will I go four-for-four? Only time will tell, but, as always, I highly doubt these valuations can hold up against the S&P 500.

This incredible tech stock is growing two times as fast as Google and Facebook, and more than three times as fast as Amazon.com and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table. And why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!

The article 5 Stocks You Can Sell Right Now originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool recommends Amazon.com, Apple, Facebook, Google, LinkedIn, TripAdvisor, and Yandex. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Google, LinkedIn, and TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

What is Short Selling?

Make a profit when stocks prices fall.

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Add a Comment

*0 / 3000 Character Maximum