5 Most Overvalued US Stocks: In the midst of a bear market’s influence, certain names continue to be labeled as overvalued. According to data as of January 9, 2023, analysts at Morningstar have identified 130 out of 847 U.S.-listed equities, accounting for 15%, as overpriced, as indicated by their Morningstar Ratings of 1 or 2 stars. In contrast, a year ago, Morningstar stock experts assessed around 253 equities, or roughly 30%, as overpriced compared to their established fair value estimate.
In certain industries, like utilities, instances of overpriced stocks are prevalent. Within Morningstar’s coverage, approximately 46% of stocks are deemed overpriced, while an additional 43% are categorized as being at fair value.
In other sectors, such as communication services and real estate, costly stocks are even scarcer, with just 4% of communication services stocks and 5% of real estate stocks rated pricey.
We performed a quick screen that ranked all 847 U.S.-listed stocks by their price/fair value ratio, a metric that subtracts a stock’s price from its Morningstar fair value assessment, to find the most expensive stocks among those covered by Morningstar. Stocks with ratios over 1.0 are often seen to be overvalued, while those with ratios below 1.0 are thought to be undervalued. Our list of U.S.-listed coverage’s top five most overpriced names includes:
- TAL Education Group TAL
- Hess HES
- Dick’s Sporting Goods DKS
- Old Dominion Freight Line ODFL
- Cintas CTAS
The reasons why Morningstar analysts believe that these stocks are significantly too costly are highlighted below. The top 10 overall expensive equities are included in the article’s conclusion.
TAL Education Group
- Morningstar Rating: 2 Stars
- Price/Fair Value Ratio: 1.65
The Chinese private education services firm TAL Education Group saw its shares soar and become one of the best-performing companies in 2022 after suffering excruciating losses as a result of Chinese rules that prohibited for-profit academic tutoring in the nation during 2021. According to Cheng Wang, an equities analyst at Morningstar, the rise was fueled by “investor speculation of a policy reversal on K-9 academic after-school tutoring given the Chinese government’s reversed course on the real estate sector and loosened regulation on the tech sector.”
With a 65% premium over its estimated $5.60 fair value, TAL Education is now one of the most overvalued companies of 2023 after starting 2022 as one of the most undervalued stocks.
Wang believes that the anticipated benefits of a future change in China’s after-school tutoring regulations may not materialise. Although Wang thinks that the government’s shift to an economic growth mentality will make China’s regulatory environment more favourable for private education providers, he believes that policies against for-profit K-9 academic tutoring are unlikely to be relaxed in the same way that regulations in the technology and real estate sectors have been. According to him, real estate is significantly more significant to China’s economy than after-school tutoring.
Furthermore, TAL Education has already changed the direction of its company to concentrate on nonacademic tutoring, learning materials, and learning technologies, and has split off its K-9 academic tutoring business. “TAL will not benefit, even if there is any regulatory ease, unless the government permits the business to be for-profit again.”
Hess
- Morningstar Rating: 1 Star
- Price/Fair Value Ratio: 1.64
Hess, a producer of oil and gas, had its shares increase 94.1% in 2022, almost doubling. Operating margins increased from 22.8% for the same time a year earlier to 33.1% during the third quarter of 2022 as a result of higher oil prices. Investors applauded the company’s efforts to cut expenses, which helped to widen profits.
The portfolio has undergone an amazing transformation under Hess’ leadership in recent years, with a focus on low-cost resources in the Bakken and Guyana that earned the company a narrow moat rating in March 2021. According to David Meats, director of equities research, energy and utilities at Morningstar, “These assets give Hess the potential to deliver strong capital returns along with significant growth.”
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Nevertheless, Meats still thinks that the oil and gas producer is one of the most overpriced companies on Morningstar’s coverage list, trading at a 64% premium to his $88 fair value estimate, despite the company’s impressive record.
“We believe that the excellent news is already considered. Additionally, the market appears to be more optimistic than we are about future commodity prices. Although we both believe that prices will continue high at least until 2023, our long-term oil price projection for Brent is currently $60 per barrel. Although the futures strip is backwardated (oil futures prices are often lower than current oil market prices), he predicts that it will not go below $70 until 2030.
Dick’s Sporting Goods
- Morningstar Rating: 2 Stars
- Price/Fair Value Ratio: 1.57
Shares of Dick’s Sporting Goods are trading at a 57% premium to their estimated $82 fair value. According to Morningstar Senior Equity Analyst David Swartz, the expansion of the athletic goods company has been “anomalous.” Operating margins increased from 7.7% to 16.5% for the fiscal year that ends in January 2022, a more than doubling.
Although company sales have been quite robust over the previous two years, Swartz argues that a slowdown is anticipated since external competition has traditionally kept athletic goods retail growth to a minimum. As of October 31, 2022, operating margins had already begun to decline, reaching a trailing 12-month figure of 13.4%.
Additionally, he adds, “Inventories across the activewear industry remain high, necessitating more markdowns than currently assumed.”
Old Dominion Freight Line
- Morningstar Rating: 1 Star
- Price/Fair Value Ratio: 1.52
Matthew Young, a Morningstar senior equities analyst, considers Old Dominion Freight Line to be “the clear industry leader in terms of execution, freight selection, and service quality.” In addition, the business is “materially more profitable than any of its publicly traded peers.” As a result, it typically trades at a significant premium relative to its rivals.
In general, trucking company stock values have started to decline recently as forecasts for freight demand and pricing have weakened. Nevertheless, with a premium of 52% to its $201 fair value estimate, Old Dominion Freight Line’s stock continues to be among the most overpriced in Morningstar’s U.S.-listed coverage list.
“I believe the market disagrees with us on our forecast for the midcycle margin. We choose a more cautious approach, not because of execution, but rather because LTL shipping is a seasonal, price-sensitive industry, according to Young.
Cintas
- Morningstar Rating: 1 Star
- Price/Fair Value Ratio: 1.51
According to Morningstar Senior Equity Analyst Joshua Aguilar, the stock of Cintas, the largest seller and renter of uniforms in the United States, is around 51% overpriced in comparison to its estimated $292 fair value. Aguilar anticipates that the recessionary pressures and rising energy prices would impede the company’s growth, despite the fact that it has been posting solid results, with revenue increasing by 10.4% during the fiscal 2022 and operating margins increasing slightly to 20.2% from 19.5% in 2021. According to him, natural gas and electricity—both of which have escalating prices—make up around 40% of Cintas’ energy costs.
A rise in competition is also beginning. “Cintas has asserted that its goods and services are of higher calibre, but we remain doubtful that its products and services are actually ‘better enough’ to compete,”
A potential negative impact on the company’s performance due to a recession is suggested by Aguilar, who characterizes the industry as “highly cyclical” owing to the strong correlation between its primary uniform services business and U.S. employment patterns.
In a conference call to discuss profits, “management confidently claimed that Cintas has been able to bring in new business clients during previous recessions because the value it offers customers has remained robust. However, given the uncertainty surrounding the duration, severity, and repercussions of a prospective recession in the American and worldwide economies, we do not share the same optimism, according to Aguilar.
