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.
Separating true intrinsic value from speculation isn’t easy, especially during bull markets. That’s where StockStory comes in - to help you find high-quality companies that will stand the test of time. That said, here are three high-flying stocks with big downside risk and some other investments you should consider instead.
American Outdoor Brands (AOUT)
Forward P/E ratio: 32.3x
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Is AOUT Risky?
- Products and services have few die-hard fans as sales have declined by 7.1% annually over the last five years
- Projected 6 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Improving returns on capital suggest management is identifying more profitable investments
American Outdoor Brands’s stock price of $17.90 implies a valuation ratio of 32.3x forward P/E. Dive into our free research report to see why there are better opportunities than AOUT.
West Pharmaceutical Services (WST)
Forward P/E ratio: 40.8x
Founded in 1923 and serving as a critical link in the pharmaceutical supply chain, West Pharmaceutical Services (NYSE: WST) manufactures specialized packaging, containment systems, and delivery devices for injectable drugs and healthcare products.
Why Does WST Give Us Pause?
- Annual revenue growth of 4.8% over the last five years was below our standards for the healthcare sector
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 4.5 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
West Pharmaceutical Services is trading at $408.35 per share, or 40.8x forward P/E. Read our free research report to see why you should think twice about including WST in your portfolio.
Waste Connections (WCN)
Forward P/E ratio: 31x
Operating a network of municipal solid waste landfills in the U.S. and Canada, Waste Connections (NYSE: WCN) is North America's third-largest waste management company providing collection, disposal, and recycling services.
Why Does WCN Worry Us?
- Sales trends were unexciting over the last two years as its 6.9% annual growth was below the typical industrials company
- Free cash flow margin shrank by 2.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
At $191.82 per share, Waste Connections trades at 31x forward P/E. To fully understand why you should be careful with WCN, check out our full research report (it’s free).
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