Sell These 2 Overvalued Stocks

With the market severely overvaluing these two stocks, they should be sold immediately so you don’t own them when they eventually fall. Find out the names of these two stocks and even how you can make some money if the prices do start to plunge.

All investing is arbitrage. The underlying belief of all (non-dividend) investments is that a stock’s future price will differ from its current price. This fact has given way too many models that attempt to find the correct, fair valuation of a stock so that mispricings in the market can be located.

One such model is Graham’s Number (GN). The creator of this number Benjamin Graham, was one of Warren Buffet’s early investing mentors. Like Buffett, Graham employed a simple approach to value investing, using GN to find stocks that are underpriced.

The GN calculation is so straightforward that you can perform it with only two variables and a coefficient: Earnings Per Share (EPS) and Book Value of Equity Per Share (BVPS)

GN = (22.5 * EPS * BVPS)^(1/2)

Here, EPS is that of the past twelve months, and BVPS stands for book value per share. Both metrics are easily looked up online. Thus, we can sift through lists of stocks, applying GN until we find clear mispricings – i.e., stocks trading at values significantly below their GNs.

Unfortunately, for most investors, the current market gives GNs much higher than true stock prices. The market is overpriced for the most part. However, options investors can easily take the short side when we find GNs that are much higher than the respective stock prices.

Today, we look at three stocks with GNs significantly lower or higher than the actual prices. Then, we look at some options strategies to invest in these mispricings. Let’s begin:

The Swatch Group AG (OTCMKTS: SWGAY)

The GN calculation for SWGAY is $15.34. The stock is trading at $13.59. This implies an upside of 13% in a market that is usually overvalued.

So, it seems we can still find strong, well-regarded companies that are underpriced. My discounted cash flow model also shows SWGAY as undervalued. My model runs on annual numbers, so the last calculation was actually from six months ago:

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A third sign that SWGAY is undervalued lies in the EBITDA/EV ratio (Earnings Before Interest Taxes Depreciation Amortization/ Enterprise Value), which is one of the few metrics with statistical significance in predicting stock price movement. SWGAY’s EBITDA/EV ratio is on the rise, implying that the stock should follow. Note that it also correctly predicted that SWGAY would fall from 2014 to 2016 and rise from 2011 to 2014:

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