The Market's Most Overvalued Stocks
Consider selling these pricey shares.
by Mitchell P. Corwin, CFA, CPA |
Equity valuations as a whole have barely budged in 2005, but the market remains a bit on the pricey side when comparing to Morningstar's collective fair value estimates (To see more on Morningstar's perspective on market valuations, check out our Market Valuation Graph). The median stock in our coverage universe of more than 1,500 stocks is now trading at about a 5% premium to our estimate of its fair value. However, within our overall coverage universe, there remain plenty of stocks trading at significant discounts or premiums to our fair value estimates.
For this week's Stock Strategist, we'll take a look at some stocks at the high end of the range: those trading at prices more than two times our estimate of the company's underlying fair value. About 75 stocks were pricey enough to pass this screen as of
Approximately 60 stocks made the final cut. Nearly one fourth of those stocks were in the energy sector and another fourth are classified as industrial firms. The common thread running through many of these high-priced stocks is the influence of recent spikes in the pricing for commodities such as gold/silver, steel/iron, coal, and oil/gas. Certainly, the bulk of those stocks could get hammered should growth in global output decline.
In addition to energy and industrials, many other sectors are represented in this list, including media, business services, financial services, hardware, health care, and media. I thought I'd highlight a few of these larger companies in sectors that aren't leveraged to the price of commodities:
Sirius Satellite Radio SIRI
Price/fair value ratio: 330%
From the Analyst Report: "With all of the substitutes to satellite radio available, each installed satellite radio unit will not translate into a self-paying subscriber. Not all consumers will want to pay $150 per year for satellite radio when terrestrial radio, still available through satellite radio hardware, costs nothing. Also, for a monthly fee approximating what XM charges, digital music services offer vast libraries of downloadable songs for MP3 players that can be linked with car stereos for hours of commercial free listening. In our opinion, digital broadcasts from terrestrial radio, wireless networks capable of streaming Internet radio into the car and content through cell phones loom as potential threats, too."
Ameritrade Holding AMTD
Price/fair value ratio: 231%
From the Analyst Report: "If you like roller coasters, Ameritrade could be the stock for you. While recent earnings have been the best in the company's history, it's important to remember that the firm's business model, cash flows, and stock price are all extremely cyclical, explaining our above-average risk rating."
WebMD HLTH
Price/fair value ratio: 233%
From the Analyst Report: "At its core, WebMD has primarily been a claims clearinghouse serving medical practices that have fewer than 25 physicians. About 60% of revenues come from its transactional services unit, WebMD Business Services, which faces fierce competition. Not only does this segment rely on a network of rival clearinghouses to route health-care transactions between providers and payers, but signs that payers are bypassing it to connect directly with providers are also emerging."
MEMC Electronic Materials WFR
Price/fair value ratio: 276%
From the Analyst Report: "MEMC Electronic Materials is one of many suppliers of silicon wafers, the disks on which semiconductors are fabricated. Despite the firm's impressive comeback, the industry's commodity nature and MEMC's capital intensity still concern us."
LSI Logic LSI
Price/fair value ratio: 208%
From the Analyst Report: "LSI has also struggled to keep pace within its own ASIC market. The firm has steadily been losing share, as its manufacturing capabilities have fallen behind those of rivals like IBM. Larger ASIC suppliers, by streamlining their leading-edge manufacturing with the design process, offer a much higher value proposition to customers than LSI, in our view."
Human Genome Sciences HGSI
Price/fair value ratio: 219%
From the Analyst Report: "Human Genome Sciences is pumping drugs into its clinical pipeline and has topnotch scientists, a strong management team, and a great vision. But no matter how you splice the numbers, with no product revenue in its near future, this genomics-based drug-research company remains a highly speculative investment."
