Why are stocks overvalued?
An overvalued stock has a current price that is not justified by its earnings outlook, known as profit projections, or its price-earnings (P/E) ratio. Consequently, analysts and other economic experts expect the price to drop eventually.
Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 92% to 154%, depending on the indicator, up from last month's 88% to 148%. This is the highest range we have seen since January 2022.
A stock becomes overvalued when its intrinsic value (aka true value) falls below its market value. Analysts come up with a stock's intrinsic value through methods like a discounted cash flow analysis, PE ratio, or asset-based valuation.
In short – if a stock is overvalued, you're going to be overpaying if you decide to buy it – and that's something you always want to avoid.
Considering to invest in an undervalued stock list can be a good investment if you are willing to take on some risk and have a long-term investment horizon. However, one must consider their investment goals and risk appetite before investing.
What Is "Overvalued"? An overvalued stock has a current price that is not justified by its earnings outlook, known as profit projections, or its price-earnings (P/E) ratio. Consequently, analysts and other economic experts expect the price to drop eventually.
If you buy an overvalued stock, it will likely end up underperforming the market as the price eventually falls back to its real value.
Amazon's performance remains strong, with robust earnings and reasonable valuation metrics suggesting the stock is not overvalued.
From a profit perspective, Costco stock trades at a price-to-earnings (P/E) ratio of 47. That valuation is double the average P/E ratio of the S&P 500, which currently sits at 23. It essentially means investors think Costco is worth buying at twice the price of an average stock.
| Symbol | RSI (14) | Price |
|---|---|---|
| LABP D | 95.58 | 21.49 USD |
| VVPR D | 93.99 | 6.41 USD |
| ALCC D | 92.61 | 12.87 USD |
| ABIO D | 92.56 | 3.25 USD |
What is an example of an overvalued stock?
What Does Overvalued Mean? An overvalued asset is an investment that trades for more than its intrinsic value. For example, if a company with an intrinsic value of $7 per share trades at a market value $13 per share, it is considered overvalued.
Generally, undervalued shares are favored over overvalued ones, as the investors buy low and sell high. If the company is performing well, it can give promising returns. Buying an overvalued share doesn't have this advantage, as the price returns to its intrinsic value, which is lower.
This level is consistent with the five-year average of 25.6x but exceeds the 10-year average of 22.9x. Despite the slightly elevated figures above the average, the present valuations of the U.S. stock market do not significantly indicate an overvaluation concern.
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is arguably the most undervalued member of the Magnificent Seven. The advertising giant trades at a 29 P/E ratio and has been expanding its profit margins thanks to cost-cutting and top-line growth.
| S.No. | Company | Industry/Sector |
|---|---|---|
| 1. | Tata Consultancy Services Ltd | IT - Software |
| 2. | Infosys Ltd | IT - Software |
| 3. | Hindustan Unilever Ltd | FMCG |
| 4. | Reliance Industries Ltd | Refineries |
As far as Nifty is concerned, it has traded in a PE range of 10 to 30 historically. Average PE of Nifty in the last 20 years was around 20.* So PEs below 20 may provide good investment opportunities; lower the PE below 20, more attractive the investment potential.
When stocks become overvalued it is often called a "bubble." • The worst one day percentage fall of the U.S. stock market was on October 19, 1987.
Some traders consider stock to be undervalued if the earnings yield is higher than the average interest rate the US government pays when borrowing money (known as the treasury yield). Earnings yield example: ABC has EPS of $10 and the share price is $50. The earnings yield will be equal to 20% ($10/$50).
Fair Value Estimate for Apple
With its 2-star rating, we believe Apple's stock is overvalued compared with our long-term fair value estimate of $160 per share.
Amazon has a conensus rating of Strong Buy which is based on 41 buy ratings, 0 hold ratings and 0 sell ratings. The average price target for Amazon is $209.74. This is based on 41 Wall Streets Analysts 12-month price targets, issued in the past 3 months.
How high will Amazon stock be in 5 years?
Still, we can use Amazon stock's present valuation to at least figure out a plausible target price. Trading at around 50 times forward-looking earnings and a little less than 3 times its trailing-12-month sales, Amazon shares could be in the ballpark of $400 apiece in 2028.
Fair Value Estimate for Walmart
With its 2-star rating, we believe Walmart's stock is overvalued compared with our long-term fair value estimate, which we have raised to $50 per share from $49 following its most recent earnings report and 3-for-1 stock split, primarily due to the time value of money.
Walmart has a conensus rating of Strong Buy which is based on 25 buy ratings, 3 hold ratings and 0 sell ratings. What is Walmart's price target? The average price target for Walmart is $65.73. This is based on 28 Wall Streets Analysts 12-month price targets, issued in the past 3 months.
As of 2024-02-19, Microsoft Corp's intrinsic value as calculated by the Discounted Earnings model is $292.58. It's currently trading at a price of $404.055. Therefore, the margin of safety based on the DCF model is -38.1%. The company is modestly overvalued.
1. Berkshire Hathaway ($628,390) Berkshire Hathaway is the holding company of billionaire investor Warren Buffett. Berkshire Hathaway A shares (BRK.A) reached a high of $628,390 on March 20, 2024.1 The stock traded at $623,300 per share as of the intraday trading session on March 26, 2024.
