Why Not All Good Companies Are Among the Best Stocks to Buy

Sometimes it's easy to mislabel fantastic companies as great stocks to buy, but the two attributes don't always go hand in hand.

That's because sometimes these great companies watch their share prices climb faster than the underlying fundamentals.

This is often the case with companies/brands that are a big hit with consumers, like Lululemon Athletica Inc. (Nasdaq: LULU) and Chipotle Mexican Grill Inc. (NYSE: CMG).

Since these companies are overpriced, they are usually most vulnerable to a market correction.

Investors should sweep their portfolios now to make sure they aren't holding any of these "high-risk" stocks.

To identify them, investors should look at the price/earnings ratio and price/earnings/growth ratio of the companies they hold.

High P/E and P/E/G ratios often indicate companies whose share prices have been bid up to a point that is no longer justified by fundamentals. The companies themselves might be good investments, but not at the current share price.

Here are two companies that fall into this category right now.

Two Stocks Not to Buy

One example is Boston Beer Co. Inc. (NYSE: SAM), trading around $160.

This is a fantastic company that brews craft beers and has done a great job of creating and marketing new products to complement its core Sam Adams lager product. The stock is up more than 50% in the past year and has risen eight-fold since the 2009 lows.

All of this appears to be more than priced into the stock with a price to earnings multiple of 36. Sales growth is slowing and earnings for the fourth quarter and full year of 2012 were slightly less than 2011.

The PEG ratio now stands at 1.89, a level that many market observers consider to indicate overvaluation based on earnings. Insiders appear to be wary of the stocks prospects as officers and directors have been consistent sellers of the stock since November.

Should the market correct this stock could experience a meaningful decline.

Another overvalued stock is the popular athletic apparel company Under Armour Inc. (NYSE: UA). Any investor concerned about market risk should avoid this stock.

This is a fantastic company with great products but the truth is the shares are too highly valued for the current economic environment. The stock is trading above $50.

The stock has advanced over the past several years where the valuation does not appear to be sustainable. The stock is up five-fold since the 2009 bottom, but this year investors are already becoming concerned about the steep earnings multiple of the stock. Under Armour trades at more than 40-times current earnings and has a PEG ratio of 2 at the current price.

Given the high multiples and developing price weakness this stock could easily become a casualty in a sell off or correction in the stock market.

The only way these stocks would be "Buys" again is if there was a steep sell-off. With both trading at more than 30 times earnings, they have a long way to fall before making it back into the "stocks to buy" category. Investors should be cautious if they recently purchased shares.

For more stocks to buy that will pay you even if the market pulls back, check out 10 Dividend Stocks to Buy Now.

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