10 Most Overvalued Stocks Of The S&P 500 - February 2019

There are a number of great companies in the market today, but there are also a number of companies that are vastly overvalued by the market. By using the ModernGraham Valuation Model, I’ve selected the ten most overvalued companies of the S&P 500 recently reviewed by ModernGraham.

All of these companies are not suitable for the Defensive Investor and/or the Enterprising Investor. Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.

Autodesk, Inc. (ADSK)

Autodesk, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $0.82 in 2015 to an estimated $-1.47 for 2019. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Autodesk, Inc. revealed the company was trading above its Graham Number of $0. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was -103.19, which was below the industry average of 56.55, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-11.52.

Autodesk, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D. (See the full valuation)

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AES Corp (AES)

AES Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $0.16 in 2014 to an estimated $-0.04 for 2018. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into AES Corp revealed the company was trading above its Graham Number of $12.73. The company pays a dividend of $0.48 per share, for a yield of 3.1%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was -380.66, which was below the industry average of 21.62, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-32.73.

AES Corp scores quite poorly in the ModernGraham grading system, with an overall grade of D+. (See the full valuation)

(Click on image to enlarge)

ConocoPhillips (COP)

ConocoPhillips does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

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Disclosure: The author held a long position in WestRock Co (WRK) but did not hold a position in any other company mentioned in this article at the time of publication and had no ...

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Moon Kil Woong 6 months ago Contributor's comment

Many companies that have declining earnings and sales tend to be overvalued from a technical perspective. The hope of many investors that stick with the company is that things will turn around or that it was transitive due to one reason or another. They are either rewarded for sticking through the downturn or punished as the stock price adapts to its new lowered profile. In most cases just looking at such stocks from a pure numbers valuation is dangerous.

There are a lot of overvalued stocks. I think there are more than just these and many are just because investors have valued the stocks too high rather than them already showing growth and profitability declines.