Dolby (NYSE:DLB) is looking overpriced

As the market drops below 10,000, I can't help but start contemplating a good stock to short. With a lot of stocks still near a 52 week high, there are a lot of options. But the first stock that comes to mind is Dolby Laboratories, Inc. (NYSE:DLB).
The reason it comes to mind is Dolby is near the top of my 'Stocks to Watch' list, and I've noticed that it's looked overpriced for the past 6 months.

Looking at the chart, you can see DLB took off like a rocket back in October, jumping from $38 a share to a high point of $53.33.

The news that set the fire to the fuse was two-fold; renewal of their Stock Repurchase program and their FY 2010 Outlook came in above analysts estimates. Let's dissect these two bits of news and see if the stock really deserves to be trading as high as it is.

Stock Repurchase Program

Dolby's 250 Million buyback program sounds awesome at first, except the objective of the ongoing program is to offset dilution from the Company's equity compensation program. The repurchase program would have more value for investors if they bought back more than they are granting in stock compensation to their senior leadership.

FY 2010 Outlook

Dolby raised its 2010 outlook twice so far, on November 3rd they announced estimated revenue between $720 to $750 million, and on February 3rd they announced revenue in the range of $780 - $810 million.

Bottom Line: While their revenue outlook is looking healthy, the forward P/E of 21.78 is not compelling enough for me to justify a long position. I'd like to see the Forward P/E drop to about 1/3 of its current level. At this point I believe that Value investors will jump back in and give the stock some upward momentum again. But until then, I recommend shorting with a price target of $34.

Disclaimer: The author does not own positions in the securities noted in this article