If the S&P 500 is valued at 18 times forward earnings, does that mean that the market is wildly overvalued? If a company’s stock price is valued at 50 times or 100 times expected earnings, does that mean that the stock is grossly overvalued? The answer to these might seem like a resounding yes. The reality is that “value” and “overvalued” might be more circumstantial and dependent on many issues outside of traditional analysis.
Now that Friday’s substantial sell-off proved that the market can actually fall, 24/7 Wall St. wanted to look at some of the more exposed stocks that investors might begin to worry about for valuation risks.
It seems unfair to universally say that a stock is overvalued. It also seems hard to say that the S&P 500’s 18 price-to-earnings (P/E) ratio is off the chart — it has been higher in the past, and interest rates are viewed as low even if the Federal Reserve does hike again.
The issue to consider is that stocks get valued at a premium for a reason. That is why we outlined why investing community might be concerned about these valuations. That being said, they are all valued there today for a reason. We would also point out that if the market takes off to the upside that the high valuations probably will not matter to anyone except for skeptics on the sideline who do not move the market anyway.
24/7 Wall St. evaluated some traditional P/E metrics, but then went into what is driving the current valuations. We also included what the analysts thought and gave other flip-side views that might keep these “overvalued” stocks from really being that much overvalued.
By almost any metric, Amazon.com Inc. (NASDAQ: AMZN) is valued at a crazy level, even its $365 billion market cap. Still, the reality is that investors just do not evaluate it based on earnings multiples. They are looking to market share and dominance that will drive earnings after 2020. Amazon is valued at almost 200 times earnings, and is valued at 73 times forward earnings. We have even said before that Amazon wants to operate like a nonprofit because it will tolerate no margins or negative margins to win more market share.
Amazon shares are up 12.5% so far in 2016. To show just how at-risk these sky-high valuations are, after a recent peak of $790, its shares closed down at $760.14 on Friday. Amazon also is unlikely to pay a dividend anytime soon. Its cash balance is less than $18 billion, and its net tangible assets after backing out liabilities and intangible assets are a mere $12.7 billion.
The flip side of the valuation here is that Amazon is dominating its peers. Its stock recently hit all-time highs, and its AWS unit is driving the cart. Amazon also has more categories in retail and services it can pursue if it chooses. If you simply used P/E ratios going back to 2000, you would have never owned Amazon and it would have destroyed more short sellers than could easily be counted. Traditional metrics just don’t seem to matter here. Also, analysts chased their target prices much high after earnings, and the consensus analyst target is even calling for another $100 or so upside in Amazon shares.
Due to low oil prices, Chevron Corp. (NYSE: CVX) may be in the same boat as Exxon and other oil giants with earnings and revenue suffering. What matters for this Dow stock is that the 2016 consensus earnings estimate of $1.25 per share generates a current P/E of 81, and the $4.27 consensus for 2017 implies a value of 21.5 times 2017 earnings. What if Chevron cannot really more than triple its earnings in 2017? If oil prices dip again, that is a serious risk. Chevron is also considered to be the most at risk about its dividend of $4.28 per share.
Another issue for Chevron is that much of the oil recovery may be priced into the stock at $101.75. Its 52-week trading range is $74.96 to $107.58.
The flip side is that the consensus target price is up at $110.75. Another hope here that may negate valuation concerns is that Chevron shares were above $125 before the oil crash came to pass. If oil’s recovery continues and we are at $80 per barrel, no one will have ever cared that the stock looked overvalued at all.