With the stock market rising quickly, many companies have become expensive. Understandably, investors are considering value stocks as an alternative to frothy growth picks.
But not all cheap equities are created equal. In fact, in the case of these three overvalued value stocks to sell, the apparent discount is an illusion. That’s because these firms will likely see their profits and cash flows decline over time.
It’s a good sign when a company is quite profitable historically. But that’s not enough for a bullish thesis. The earnings must continue to ensure that the company will make a good investment. In the case of these three companies, the future looks cloudy at best, and significant share price declines could be imminent.
Moderna (MRNA)
Moderna (NASDAQ:MRNA) is a biotechnology company known for commercializing RNA-based vaccines and therapeutics. It rose to prominence thanks to its widely-used COVID-19 vaccine.
For investors looking merely at trailing earnings results, MRNA stock probably looks like a major bargain here at 11 times earnings. The issue, though, is that the COVID-19 vaccine revenue stream is rapidly drying up.
Specifically, analysts are projecting an eye-watering 61% drop in Moderna’s revenues this year. In conjunction with that, analysts expect the company to generate operating losses in 2023, 2024, and 2025 respectively.
As a reminder, Moderna generated a mere $48 million in revenues in 2019, and its stock traded in the single digits. What will MRNA stock be worth once the COVID-19 vaccines are no longer in demand, and the company’s revenues largely go away? Probably a lot less than the current $125 share price.
United Airlines (UAL)
The global travel industry has enjoyed a tremendous recovery in recent months. While COVID-19 hammered the airlines, the bust has been followed by a robust recovery.
Indeed, U.S. passenger traffic had returned to 92% of pre-pandemic levels through March. Meanwhile, holiday traffic for Memorial Day weekend in 2023 exceeded 2019 levels. Airlines are back on the upswing.
So why isn’t United Airlines (NASDAQ:UAL) a bargain at less than six times forward earnings? For one thing, the airline remains brutally cyclical; generally, it’s best to buy airline stocks during storms and sell when the skies are clear. Specifically, combining a strong economy and low jet fuel prices is about as good as it gets for airlines. United’s earnings would take a hit if fuel prices go back up or the economy tips into a recession.
Another concern is that the pandemic strained the industry. Many pilots and crew retired or moved to other professions. Shortages of labor have caused numerous staffing issues and could cause major inflation in labor costs within the industry. All this adds up to a situation where things are as good as they’re probably going to get for United, and investors should cash out before that changes.
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE:MPW) is a real estate investment trust (REIT) focused on the ownership of hospitals and health care facilities. In theory, this seems attractive, and shares certainly seem cheap. At just six times forward funds from operations (FFO) and offering a 13% dividend yield, MPW stock looks like deep value.
But it’s probably a trap. That’s because the finances of several of Medical Properties Trust’s key tenants have deteriorated markedly. The pandemic, in particular, greatly disrupted the hospital business model as higher-margin elective surgeries were delayed to direct resources to emergency care.
In any case, two of MPW’s larger tenants are now restructuring their financial obligations. There’s a good chance this will put downward pressure on the rents they can afford to pay Medical Properties Trust.
More broadly, given rising interest rates, Medical Properties Trust faces strain in maintaining its outsized dividend while handling its ample debt load. All this adds up to a significant chance of a dividend cut which, in turn, would likely provoke a major sell-off in the price of MPW stock.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
