Investment euphoria in the U.S. markets has propelled every major stock index to record highs. And as a rising tide lifts all boats, so too have macroeconomic trends increased the price of many stocks, some too much. Today we’ll take a look at some of the most overvalued stocks to sell right now. If you have these names in your portfolio, you ought to place tight stops to book profits or minimize losses, should a deep correction occur.
How to know if a stock is overvalued? A stock is overvalued when its current market price can’t be justified by its fundamentals and earnings outlook, or when key financial ratios show extreme values.
The criteria I used to find my overvalued stocks to sell are:
- P/E ratio over 50;
- PEG ratio over 3;
- P/S ratio over 10;
- P/B ratio over 10;
- Price/Free Cash Flow ratio greater than 50; and
- D/E ratio high over 0.5.
I added the D/E ratio although it does not show relative valuation because a high level of debt suggests high risk which supports the idea that these stocks may be subject to selloffs. All the other key ratios were set at extreme levels.
Here are 5 extremely overvalued stocks to sell now:
- Enphase Energy (NASDAQ:ENPH)
- IDEXX Laboratories (NASDAQ:IDXX)
- ServiceNow (NYSE:NOW)
- Square (NYSE:SQ)
- Tesla (NASDAQ:TSLA)
A stock’s value can be inflated for many reasons, such as emotional trading, whether that’s FOMO (fear of missing out) or ignoring the company’s financial strength. Or buying them for unjustified reasons, as with meme stocks, or investing in trends that may one day end, such as stay-at-home stocks during the pandemic.
Overvalued Stocks to Sell: Enphase Energy (ENPH)
With a 52-week range of $34.34 — $229.04 and a current stock price around $150, ENPH stock has had a stellar one-year performance of 326.43%. In 2021, ENPH is down almost 15%. This tech company develops, manufactures and sells home energy solutions for the solar photovoltaic industry, both in the United States and abroad. And while Biden’s infrastructure plan focusing on clean energy may support it, the company reported revenue of just $774 million in 2020 with a current market cap of $20.26 billion.
The ratio of price (market cap) to latest annual sales stands at 26.17. Profitability fell almost 17% in 2020 to $134 million, compared to $161.15 million in 2019. Sales growth fell to 24.04% in 2020 compared to 97.47% in 2019.
IDEXX Laboratories (IDXX)
IDXX stock is currently trading around $491 per share and has a 52-week range of $244.98 — $573.99. IDEXX Laboratories is about 15% off of its 52-week high and has a one-year return of 95.17% according to data from MarketWatch. The stock is almost flat in 2021, with a performance of -1.71%.
The market cap of $41.55 billion means a 15.33 for Price to Revenue ratio (revenue came in at $2.71 billion for 2020). Net income growth in 2020 was 36.02%, higher than the 13.44% reported in 2019. Likewise, free cash flow growth in 2020 of 77.88% was higher than the reported growth of 6.98% in 2019. Still, this healthcare stock seems too pricey.
IDXX is a growth stock but not a value stock, and does not pay a dividend like other health stocks.
If you look at the P/E ratio (TTM) of NOW stock for the trailing twelve months currently at 871.22 you get an early indication of an overvalued stock. Then you realize ServiceNow is a tech stock and the tech sector has rallied the most after the stock market crash last March. You then check the performance of the stock, up 95.93% over the past year but down almost 7% in 2021.
With a 52-week range of $255.24 — $598.37 the stock is off 14% from its 52-week high, with a current stock price around $514.
The company has a market cap of $100.799 billion with reported revenue of just $4.52 billion in 2020. Paying 22 times price-to-revenue is far too high.
Free cash flow growth slowed in 2020 to 40.80%, compared with 65.54% for 2019. The company reports very volatile free cash flows and net income collapsed -81.09% in 2020 to $118.5M, while in 2019 net income reported was $626.7M.
SQ stock has the same story as NOW stock. A tech stock that surged 357.07% for the past year and is up 5.66% in 2021, SQ has a 52-week range of $49.70 — $283.19, so the stock is now off about 19% from its 52-week high.
Price is different than value. SQ had revenue growth of 101.50% during the pandemic, as the company reported revenue of $9.5 billion in 2020 compared to revenue of $4.71 billion in 2019.
But again, the company now has a market cap of $104.539 billion. You know my argument by now, beyond the filters of the stock screener: a multiple of 11 times for market cap to revenue is just too high. Especially when the company reported a decline of profitability to $213.11 million in 2020, down 43.24% compared to the $375.45 million of net income in 2019.
When your company has its largest revenue growth in five years, yet you can’t turn that record revenue growth into substantial profitability, something is definitely wrong.
In the end, I left Tesla. The carmaker has yet to decide if it is a tech company or a traditional vehicles maker. This is a company that made a huge profit recently, not by selling cars, but by investing in Bitcoin (CCC:BTC-USD). And when you consider that Tesla has never turned in these kind of profits by focusing on its core operations (selling electric cars), you start to wonder.
TSLA stock had a performance of 533.47% over the past year. In 2021 it is struggling, down about 2%. In 2020 the company reported profitability for the first time to the tune of $690 million and revenue of $31.54 billion. That’s a price to revenue ratio of 21.
Now take a look at the P/E Ratio (TTM) of 1,079.77. This is way too rich, too expensive. This means an investor is willing to pay $1079.77 for $1 of current earnings.
My only question is why. This is absurd, irrational.
All these five stocks are extremely overvalued. Why risk buying them when still there are undervalued stocks in a market at record highs? Due diligence is required at all times.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.