Overvalued stocks typically trade at a price higher than their intrinsic value due to factors like high growth. However, they can be more volatile if their prices are driven by market speculation and investor sentiment rather than fundamentals. Selling such stocks on time mitigates the risks of price corrections, lost future returns, increased volatility and missed opportunities elsewhere. This is especially relevant now with markets on the downside.
When evaluating for overvaluation, it is important to analyze key metrics like the price-to-earnings (P/E) ratio and others, as well as look for profitability loss or some negative news. In addition, the relative strength index (RSI) may be reviewed to identify overbought conditions.
To find suitable overvalued stocks that are teetering on the blink of a minor or major collapse due to speculation, we looked for stocks with negative EPS and at least a 15% increase in their share prices over the past few months.
So, let’s examine three stocks that exhibit metrics outside of normal and meet some of these requirements.
Fidelity National Information Services (FIS)
Fidelity National Information Services (NYSE:FIS) provides technology solutions for merchants, banks and capital markets firms worldwide. It operates in three main business segments. Merchants represent 3% of its revenue, Banking 68% and Capital Market Solutions 29%. FIS aims to realize further synergies from its acquisitions, but the impact has been mixed.
A reduction in interest rates could benefit the company’s coverage ratio and reduce its high debt of $11.28 billion. However, it could further compress margins for the Banking Solution segment. A reduction in the Federal funds rate is not to be expected before September.
Notably, in its last quarterly earnings report, FIS reported EPS growth of 431.51% and revenue growth of 5.78%. The main contributor was its biggest revenue generator, Banking. Capital Markets experienced an 80 basis point contraction in EBITDA margin.
Yet, the company reported an annual loss for fiscal year 2023 of -$11.26 per share. With a net profit margin of -61.37% and trading 30% higher year-to-date (YTD), investors should be alarmed.
As a software company, FIS stock trades at a high P/E ratio of 106.32x. The industry average is 27.6x, making FIS one of the overvalued stocks to sell. The average analyst price target of $80.83 has also been nearly achieved, leaving little room and time to adjust positions.
TESLA (TSLA)
Tesla (NASDAQ:TSLA) designs, manufactures and sells electric vehicles (EVs), battery storage, solar panels and solar roof tiles. It aims to accelerate the world’s transition to sustainable energy. However, competition in the EV market intensifies as traditional automakers ramp up EV production and new entrants gain traction.
Supply chain issues have led to production delays and higher costs for the company. Regulatory investigations into Autopilot and claims of full self-driving continue to loom over Tesla. And Elon Musk’s controversial behavior and poor corporate political disclosure raise concerns for Tesla’s brand favorability.
Besides these factors, Tesla’s most recent financial results indicate cause for concern. Revenue growth slowed by 9.27% in the first quarter, coming in below analyst expectations. Due to increased costs, gross profit margins declined to 19.3%, while EPS decreased by 53.79% from the prior quarter.
With Tesla set to report earnings next week, risks of another earnings miss are real as TSLA stock has traded up over 60% in the past three months. With guidance indicating ongoing margin pressure and the RSI into overbought territory, Tesla may be one of the overvalued stocks to sell.
Peloton Interactive (PTON)
Peloton Interactive (NYSE:PTON) provides connected fitness products, including bikes, treadmills and subscriptions, for live and on-demand workout classes. The company has faced several challenges, including product recalls, supply chain disruptions and negative publicity related to safety concerns.
While PTON continues developing innovative fitness solutions, investors may want to consider it as one of the overvalued stocks based on its financial performance and broader economic factors like inflation.
Peloton Interactive’s 2023 annual revenue declined 21.3% to $2.8 billion from $3.75 billion, with quarterly down 4.17%. Despite an improving gross margin, the company reported a net loss of $167.3 million and -$1.26 billion for the full year. This continued trend of net losses reflects ongoing profitability challenges.
Despite consecutive losses and negative earnings, PTON stock has risen around 25% in the past three months. Forward valuation metrics, such as forward EV/FCF of 826.37 and forward EV/EBITDA of 31.47, suggest that the market expects a substantial improvement in Peloton’s performance. However, given the company’s recent track record, these expectations may be overly optimistic. PTON is one of the overvalued stocks that may be considered for sale.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Automotive, Consumer Discretionary, Electric Vehicles, Financial, Fintech, Retail, Software, Energy, Renewable Energy, Solar, Technology