5 Overvalued Stocks in a Highly Valued Stock Market

September 12, 2016 by Jon C. Ogg

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.

Amazon

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.

Chevron

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.

Netflix

Netflix Inc. (NASDAQ: NFLX) always screens out as an expensive stock. It is worth almost $43 billion in market capitalization, and growth trends in the United States have become mixed. Whether the international growth expectations can outweigh domestic price hike controversies remains up for debate. The stock is valued at 300 times current earnings expectations and is valued at over 100 times expected 2017 earnings. Even with an expected 20% revenue growth, these levels look astronomical.

Netflix shares almost touched $100 on Thursday, but they closed down at $96.50 on Friday. That would be like the Dow dropping 650 points in a day. What if Netflix cannot keep up with rising costs of content? What if Netflix runs into the same issue as other international companies not being able to repatriate foreign earnings without a penalty?

The flip side of the overvalued argument is that much of Netflix’s weakness has already been seen. At $97.50 now, it has a 52-week range of $79.95 to $133.27. That means it is much closer to lows than highs. Also, the consensus analyst price target of $104.42 implies that Netflix could rise even further. One analyst even sees the stock with 50% upside.

SL Green Realty

A top commercial office and retail properties real estate investment trust (REIT), SL Green Realty Corp. (NYSE: SLG) has an $11 billion or so market cap, which should prove it is a substantial player. Many investors have feared that REITs in general are in a serious valuation premium due to “lower for longer” interest rates. This yield is not even 2.6%. SL Green shares were last seen trading at $112.00, in a 52-week range of $80.12 to $121.94.

To show just how some investors might be concerned, the reality is that this stock was up over $118.70 as recently as September 7, and they closed down at $111.00 during Friday’s sell-off. That’s a 6.5% drop from last week’s peak to trough. REITs trade on a funds from operations (FFO) basis, but it does screen out with a 26.5 P/E ratio, which is quite high for an S&P 500 stock.

The flip side of the valuation here is that the $125.19 consensus analyst price target implies that SL Green shares should actually be 10% higher.

Tesla Motors

Tesla Motors Inc. (NASDAQ: TSLA) is already well off of its highs, but the reality is that many investors feel this would not be valued anywhere close to this price if there weren’t an Elon Musk premium. Tesla’s market value is almost $30 billion, versus $50 billion for Ford and $48 billion for GM. Tesla is valued at more than 100 times forward earnings expectations.

Tesla’s efforts in acquiring SolarCity brings up two risks: one is that it could act carelessly, and another is that it might not care about the earnings story for investors. Tesla also has all of its marbles riding on major growth targets that it hopes to hit in 2018 and 2020.

The flip side here is that the market keeps touting Musk’s visionary status. They love the electric cars, and the move into the Power Wall and into SolarCity did not crush shares as much as many skeptics may have assumed. That said, Tesla’s stock is already down 25% from its 52-week high. The consensus price target of $240.00 implies more than 20% upside ahead.

I'm interested in the Newsletter
 

Note that valuations for current and forward P/E data come from Thomson Reuters, and price performance and other data from FINVIZ and Yahoo! Finance.