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Special Report

Stocks to Avoid

It's hard to justify these high prices.

When markets turn volatile, it can be increasingly difficult for investors to know which end is up. A stock that was undervalued in late September when the market bottomed might be overpriced today. Some highly leveraged companies might be great performers in a good economy. But in a recession, when their cash flows dry up--and the debt payments get hard to make--they might not look nearly as attractive.

In some cases, the choices are more clear-cut. Some companies like the five we're highlighting below are respected leaders in their industry segments. These companies have a lot going for them, whether it's strong growth, wide margins, or esteemed brand names. However, despite all their competitive advantages, the Morningstar analysts who track these stocks don't think they have enough going for them to justify their high prices, making them stocks to avoid.

Viacom : CBS's parent company needs another hit like Survivor to keep growth humming. Without it, we think this company might need to win an "immunity challenge" to protect  its expensive stock.

E*Trade (ET): The online broker turned a profit in a difficult third quarter. But  one good quarter does not a company make.

Baxter International (BAX): Sure, the big kahuna of medical devices will keep growing fast. But we don't think it can keep growing fast enough--for long enough--to stand behind  the stock's high price.

FedEx (FDX): Yes, they ship packages very fast, but that requires a lot of capital spending.  These heavy expenses make this a hard stock to like.

William Wrigley Jr. : This is a solid company with great products and strong brand names. Unfortunately, we believe that they'd have to sell  a lot more Juicy Fruit than we think possible to approve the inflated price.

Craig Woker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.