Overvalued stocks are prevalent in today’s market. Based on the historical ratio of total market cap over GDP (currently at 193.4%), the Buffett Indicator suggests that the U.S. stock market is significantly overvalued. Overvalued stocks like this will likely return only 0.5% yearly, including dividends from this valuation level.

Below, you’ll find three stocks that appear significantly overvalued due to hype. These stocks have a high probability of dropping out of the rarefied air of the stratosphere soon enough. We’ll evaluate whether these stocks are overpriced by examining their price-to-earnings (P/E) ratio, price-to-earnings-growth (PEG) ratio and intrinsic value based on a discounted cash flow (DCF) methodology.

As Peter Lynch advises, the best buying opportunities come when a stock’s P/E is below 15. Lynch says a stock’s P/E should equal its expected growth rate, meaning the PEG ratio should be under 1. Otherwise, the market is likely overvaluing it.

All the stocks covered here are potential great companies to own someday. However, due to extreme hype inflating their valuations, investors should practice caution until these overvalued stocks get a visit from the reality stick.

Wingstop (WING)

Wingstop (NASDAQ:WING) is an international chain of restaurants that sells mainly chicken wings. While the company is growing and will continue to grow, even the most optimistic growth expectations do not justify such a high valuation. Peter Lynch says the PEG ratio should equal 1, while, as of this writing, it equals 4.73.

Wingstop’s P/E ratio is 144.77, one of the highest in the US stock market. According to Lynch, a fairly valued stock should have a P/E close to 15.

In addition, the intrinsic value of Wingstop calculated using a discounted cash flow (DCF) model is approximately $90 per share, far below the current share price of $406.80.

While Wingstop has delivered strong growth in recent years, with 20 consecutive years of same-store sales increases and 27.1% system-wide sales growth in 2023, the valuation has gotten far ahead of itself. Expectations must reset as growth inevitably slows over time and markets become more saturated.

Given the extremely high P/E and PEG ratios and the large discrepancy between price and intrinsic value, Wingstop appears to be significantly overvalued at current levels. This overvalued stock seems ripe for a reality check. After all, the challenges of scaling such a niche restaurant brand make it difficult to justify such a rich premium.

Investors may want to wait for a better entry point before buying into the Wingstop growth story, though they might not have to wait long until reality comes knocking.

Costco Wholesale (COST)

Costco Wholesale (NASDAQ:COST), the membership-based warehouse retailer, appears significantly overvalued based on traditional valuation metrics. For example, as of this writing, the company’s stock trades at a lofty price-to-earnings (P/E) ratio of 53.02. With Costco’s current P/E more than three times Lynch’s benchmark, there’s a good chance this company’s shares are on the verge of a pullback.

Costco’s premium valuation is also unjustified based on expected profit growth. The company has a PEG ratio 4.08, again far above Lynch’s recommendation. In other words, Costco’s PEG, which is well over 4, suggests overvaluation relative to its growth outlook over the next few years.

An intrinsic value estimate further confirms Costco as an overstretched, overvalued stock. Based on a discounted cash flow model analysis, Costco has an intrinsic value of $434.98 compared to its actual market price of $855.67. With the current market price almost double Costco’s intrinsic worth, significant downside risk exists in the stock to revert toward fair value.

The membership retail giant has historically enjoyed elevated valuations, but current P/E, PEG, and intrinsic value premiums appear detached from reality. Costco seems to be on the verge of a meaningful valuation pullback at some point to better align with fundamentals. Income investors should wait for improved entry opportunities, while momentum traders should watch one of the top overvalued stocks for an impending reality check.

Eli Lilly (LLY)

Eli Lilly (NYSE:LLY) is a pharmaceutical company whose stock price has exploded over 400% in recent years. This explosion resulted from strong growth expectations for its new diabetes and obesity drugs. However, at current levels, the stock appears massively overvalued. It likely won’t be long before reality pays a visit.

With a price-to-earnings (P/E) ratio of 131, Eli Lilly trades at nearly nine times what Lynch would consider fairly valued. The PEG ratio is also extremely high at 8.4. In other words, investors pay a very high premium even if they assume strong growth ahead.

In addition, Eli Lilly’s intrinsic value calculated using a discounted cash flow model is negative. Based on free cash flow projections, it is — $49 per share, which is vastly below the current share price of $878.

The market is very optimistic about Eli Lilly’s pipeline’s blockbuster sales potential, especially its weight loss injections Mounjaro and Zepbound. However, the growth assumptions seem to have gotten far ahead of themselves. After all, the challenges of scaling and the risks in the pharmaceutical industry make overly aggressive forecasts unlikely to materialize. As a result, one of the top overvalued stocks seems ripe for a reality check at some point.

On the date of publication, Andrea van Schalkwyk did not hold (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.