While chasing returns and profits is the name of the game for investors, one way to torpedo your portfolio is to fill it with overvalued stocks.
Stocks become overvalued when they trade at a higher price than their actual value, based on measurements such as earnings and growth projections. Many investors use price-to-earnings ratios, price-to-sales ratios, or price-to-book ratios to determine if a stock is overvalued, undervalued, or fairly valued.
It’s one of the many reasons it pays to review your portfolio regularly, because what may have been a good company a year ago may be an overvalued stock today.
If you’re wondering how to identify overvalued stocks, I suggest the Portfolio Grader is the obvious solution. The Portfolio Grader puts a letter grade on stocks. The best stocks get an “A,” and the worst stocks get an “F.” The Portfolio Grader uses quantitative measurements, including earnings performance, analyst sentiment and momentum, to develop the letter grade.
It’s easy to fall into the trap of getting overvalued stocks. But you’re not in this alone. Here are some overvalued stocks you should avoid if you’re holding them this month.
|JNJ||Johnson & Johnson||160.92|
Fintech company Block (NYSE:SQ) issued its first-quarter results that included revenue of $4.99 billion and adjusted earnings of 40 cents per share, which were better than analysts expected.
Wall Street celebrated as SQ jumped more than 2% following the earnings report.
But I’m not one of those who are impressed. If you take another step and look at the company’s Form 10-Q filed with the Securities and Exchange Commission, you’ll see that the Block had a net loss of $16.83 million, or 3 cents per share.
Throw in the fact that Block’s CashApp has severe competition, and the company’s stock trades at a forward P/E of 34 right now, and it’s clear that SQ is overvalued. The stock has a “D” rating in the Portfolio Grader.
Once an innovative phone manufacturer that revolutionized how business people communicated, BlackBerry (NYSE:BB) is trying to rebrand itself as a force in the Internet of Things and cybersecurity.
Maybe it will get there. But for this May, BB stock is just overvalued and a stock to avoid.
BlackBerry’s earnings for its fiscal fourth quarter of 2023 (ending Feb. 28) included revenue of $151 million, a drop of more than 18% from a year ago. The company also lost 85 cents per share, or $495 million, in the quarter.
Its cash position also fell from $378 million a year ago to $295 million at the end of February.
There’s nothing wrong with rooting for BB stock. But recognize that it should be on your list of overvalued stocks to avoid this May. BB stock has a “D” rating in the Portfolio Grader.
Electric vehicle company Tesla (NASDAQ:TSLA) has long been overvalued, but the ridiculous growth rate still made the stock worth having for several months.
Tesla stock shot up 1,300% in a 23-month period from January 2020 to November 2021. That kind of return makes it easy to overlook a company’s flaws.
But in this what-have-you-done-for-me-lately world, Tesla is underperforming, and the flaws are harder to ignore. The company’s dropping prices to maintain market share, but that’s lowering the profit margins at an alarming rate. TSLA stock fell 40% over the last year.
Look at CEO Elon Musk’s involvement with Twitter, a $44 billion purchase financed by selling more than $22 billion in Tesla stock. That just pushed the stock price down, and investors should rightly be worried that Musk is too busy paying attention to Twitter to focus on Tesla.
Today, TSLA has a forward P/E of more than 42 and a P/B of more than 10. Factor all that in, and you get a “D” for TSLA stock in the Portfolio Grader.
Qualcomm (NASDAQ:QCOM) makes semiconductor chips used in smartphones and manufactures software and services for wireless technology.
The slowdown in smartphone sales and the semiconductor market has hurt recently the San Diego-based company. QCOM stock is down nearly 20% since Feb. 1.
Earnings for the company’s fiscal second quarter (ending March 26) included revenue of $9.3 billion and EPS of $2.15 – just a penny less than analysts’ estimates. But the revenue was markedly down from a year ago, falling by nearly 17%.
Guidance for the third quarter was also a disappointment. Qualcomm said investors could expect revenue of $8.5 billion for the quarter and earnings per share between $1.70 and $1.90. Analysts, meanwhile, were targeting $9.1 billion in revenue and EPS of $2.16.
The semiconductor slowdown will continue for the next few months – Qualcomm acknowledged as much in its post-earnings conference call with analysts. That makes Qualcomm a drain on your portfolio for now, which is why it has a “D” rating in the Portfolio Grader.
Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) is a big disappointment these days, with many questions surrounding it. The maker of bandages, health products, cold and allergy medications and cough suppressants has its stock down by 8% this year.
Its trailing P/E is a lofty 34. While that’s in line with the P/E of healthcare stocks right now, it’s a pricy indicator that shows how overvalued JNJ is at the moment.
One thing to watch is Johnson & Johnson’s spin-off of Kenvue (NYSE:KVUE), completed last week and includes many of JNJ’s most well-known brands, including Tylenol, Band-Aid, Listerine, and the company’s baby powder and shampoos.
JNJ still controls about 91% of Kenvue, and the deal is expected to help Johnson & Johnson refocus on its pharmaceutical and medical device divisions.
If you like consumer staples, then Kenvue’s product line may be more to your liking. It remains to be seen if the Kenvue spin-off will unlock the value that investors need.
JNJ stock has a “D” rating in the Portfolio Grader right now.
Nothing quite screams “overvalued” like a semiconductor company losing market share. Enter Intel (NYSE:INTC), a once-darling of the computing world that’s losing market share to Advanced Micro Devices (NASDAQ:AMD).
And if it doesn’t turn things around, Intel’s position as the top dog in the global data center market won’t last.
At the end of 2022, Intel had a 71% market share, while AMD had only a 20% share. But, Intel saw its data center revenue drop 16% on a year-over-year basis, while AMD’s revenue jumped 62%.
In the first quarter of 2023, INTC revenues of $11.7 billion dropped 36% from the previous year. Intel also recorded a net loss of $2.8 billion, just a year after posting a net profit of $8.1 billion.
Intel has a forward P/E of 66 – obviously, there’s a lot of work to do here that won’t be solved this month. INTC stock has a “D” rating in the Portfolio Grader.
3M Company (MMM)
3M Company (NYSE:MMM) is also heavily involved in the healthcare sector, although the conglomerate also has interests in consumer goods, electronics and manufacturing. It makes everything from protective equipment to medical supplies, tapes and labels, cleaning supplies and more.
First-quarter earnings included a 6.8% drop in organic sales as the company had weak sales in home health, home improvement and auto care. The company’s consumer electronics division, which includes tablets and televisions, also fell by 11.3% in the quarter. 3M issued guidance for full-year sales to range from a 3% loss to flat on a year-over-year basis.
With sales slipping for five consecutive quarters, 3M is making changes to try to right the ship. It announced plans to lay off 8,500 workers and pledged to simplify its supply chain structure while streamlining corporate.
It plans to spin off the healthcare business – 3 M’s best-performing segment – into a standalone company later this year.
Investors should be very cautious of 3M. Even if 3M can see some improvement from restructuring, the company won’t be as appealing without the healthcare division. MMM stock has a “D” rating in the Portfolio Grader.
On the date of publication, Louis Navellier did not hold (either directly or indirectly) any positions in the securities mentioned in this article.