Any stock that’s making forward progress in this market environment is certainly worth a closer look. Just because a handful of tickers continue to edge higher, however, doesn’t inherently make them buys. A bunch of them have reached relatively outrageous valuations, and they’re flirting with a wave of profit-taking once the market collectively realizes it’s priced them too richly.
Here’s a rundown of three high-profile names that are becoming — or already are — just too expensive.
1. Enphase Energy
It’s been a pretty good year for U.S. solar stocks. In addition to continued adoption of solar power, the Inflation Reduction Act currently being considered by the House of Representatives after being passed by the U.S. Senate promises to be a boon for the business, as it provides a number of clean-energy tax incentives. The end result? The MAC Global Solar Energy Index is up nearly 11% so far this year and is knocking on the door of higher highs. Shares of Enphase Energy (ENPH 4.27%) have followed suit, and for understandable reasons.
It’s not your typical solar panel maker. In fact, it doesn’t make solar panels at all. Enphase Energy instead manufacturers the microinverters that turn the sun’s rays into electricity. More than that, though, the company’s tech provides a much-needed power-management solution that’s been missing from most solar power installations thus far. Its IQ8 microinverter allows homeowners and businesses to easily switch to and from grid-supplied electricity, as well as store energy that isn’t needed while it’s being produced.
Making solar power practical for the masses is a key reason sales are projected to grow by over 60% this year, and more than 30% next year. That growth paired with legislative support for renewable energy is a key reason why Enphase stock is up by more than 50% this year despite its lousy start to 2022.
The bulls, however, have arguably gotten ahead of themselves.
While revenue may be rising at a double-digit pace, it’s decelerating rather than accelerating. Part of that slowing growth may have something to do with competition from the likes of SolarEdge Technologies, although more is likely to pop up now that the two companies have established a market for smart solar power management tools. The stock itself also has a history of slumping after sizable run-ups, as we saw in early 2021, and then again in late 2021.
Given this backdrop, the forward-looking price-to-earnings ratio of 61 is simply too much to sustain.
2. Jack Henry & Associates
You may not have heard the name Jack Henry & Associates (JKHY -0.04%). There’s a good chance, however, you benefit from its services. Jack Henry provides technology solutions for roughly 60% of U.S. banks, helping them handle tasks ranging from online banking to fraud prevention to relationship management. While the biggest of banks can handle much of this work with in-house solutions, most small and even midsize banks are better served by outsourcing this functionality.
It’s a lucrative business to be in, and Jack Henry & Associates is good at it. Only once in the past decade has quarterly revenue fallen on a year-over-year basis, and per-share earnings growth has been almost as consistent. Credit mostly goes to the business model. Jack Henry’s services are subscribed to rather than purchased one time, which drives recurring revenue. The company only needs to add paying clients to its roster to generate growth, which it has. The industry’s growth (and increasing complexity) also plays a role in Jack Henry’s continued expansion.
Investors’ bet on more of the same going forward, however, has reached overly aggressive levels. The stock price is up a hefty 26% just since the end of last year, pushing the trailing price-to-earnings ratio up to nearly 43, while the forward-looking P/E stands at a similarly frothy 40. Like SolarEdge, this isn’t a stock that holds onto its rapid run-ups all that well.
Then there’s the X-factor: the economy. If the United States happens to slip into a recession, a bunch of banks could quickly decide to tighten their purse strings, giving Jack Henry & Associates shareholders a bit of an unexpected jolt.
Finally, add Rollins (ROL 0.78%) to the list of stocks that are getting uncomfortably expensive.
You’re likely more familiar with Rollins than you might realize. It’s in the bug-killing business. It operates Orkin, as well as a few more localized extermination services. The company’s generated a little over $1.3 billion worth of revenue this year, turning $224 million of it into operating income. Both are relatively typical figures, adjusted upward to account for market share growth and inflation. In fact, not once since 2010 has Rollins reported a year-over-year dip in its quarterly sales, and its operating income growth has been almost as reliable. (As it turns out, termites, cockroaches, and other bugs are never truly exterminated … just temporarily displaced.) The company’s profit margin is widening as it grows its scale.
Recognizing the perpetual need for extermination services, investors have been willing to buy Rollins shares since the pandemic took hold. Shares are more than 30% from its January lows, and back within sight of new 52-week highs.
There’s a reason this stock’s been choppy since late 2020, though, struggling to make any meaningful net forward progress. That’s because the stock’s priced at more than 50 times this year’s expected per-share earnings, which is rich even for a company as consistent as Rollins. In short, this stock is valued like a company with much bigger — and faster — growth prospects.