The Top 5 Overvalued US Stocks: Despite the effects of a bear market, certain stocks are still seen to be expensive. Based on information as of January 9, 2023, Morningstar experts have rated 130 out of 847 U.S.-listed stocks—or 15% of the total—as overvalued, with ratings of 1 or 2 stars. A year ago, however, the stock analysts at Morningstar determined that around 253 stocks, or about 30%, were overvalued in relation to their estimated fair value.
Excessive stock prices are common in several businesses, such as utilities. About 46% of the companies that Morningstar covers are expensive, while another 43% are fair value.
Expensive stocks are harder to find in other industries, such real estate and communication services, where just 5% and 4% of equities, respectively, are considered overpriced.
To identify the priciest companies among those covered by Morningstar, we conducted a rapid screen that ranked all 847 U.S.-listed stocks based on their price/fair value ratio—a measure that deducts a stock’s price from its evaluation of fair value. It is common knowledge that stocks with ratios over 1.0 are overvalued and those with ratios below 1.0 are undervalued. The top five most expensive names on our list of U.S.-listed coverage are as follows:
- TAL Education Group TAL
- Hess HES
- Dick’s Sporting Goods DKS
- Old Dominion Freight Line ODFL
- Cintas CTAS
The reasons why Morningstar analysts believe that these stocks are significantly too costly are highlighted below. The top 10 overall expensive equities are included in the article’s conclusion.
TAL Education Group
- Morningstar Rating: 2 Stars
- Price/Fair Value Ratio: 1.65
Following painful losses due to Chinese regulations that forbade for-profit academic tutoring in the country in 2021, the Chinese private education services company TAL Education Group saw its shares surge and emerge as one of the top-performing businesses in 2022. The surge was caused by “investor speculation of a policy reversal on K-9 academic after-school tutoring given the Chinese government’s reversed course on the real estate sector and loosened regulation on the tech sector,” according to Cheng Wang, an equities analyst at Morningstar.
TAL Education began 2022 as one of the most inexpensive stocks and is now one of the most overvalued firms of 2023, trading at a 65% premium above its projected $5.60 fair value.
Wang thinks it’s possible that the advantages of a potential reform in China’s after-school tutoring laws won’t materialize. Wang believes that China’s regulatory environment will be more favorable for private education providers despite the government’s shift to an economic growth mentality. However, he also believes that policies prohibiting for-profit K–9 academic tutoring are unlikely to be loosened in the same way that laws governing the real estate and technology industries have been. He asserts that after-school tutoring is not nearly as important to China’s economy as real estate is.
Additionally, TAL Education has previously divided its K–9 academic tutoring business and redirected the firm to focus on nonacademic tutoring, learning resources, and learning technology. “TAL will not profit, even in the event of regulatory relief, unless the government allows the company to operate as a for-profit enterprise once more.”
Hess
- Morningstar Rating: 1 Star
- Price/Fair Value Ratio: 1.64
In 2022, the shares of Hess, an oil and gas firm, increased by 94.1%, almost tripling in value. Higher oil prices caused operating margins to rise from 22.8% at this time last year to 33.1% in the third quarter of 2022. Investors praised the company’s cost-cutting measures, which aided in increasing earnings.
With an emphasis on inexpensive resources in the Bakken and Guyana, the portfolio has had an incredible change under Hess’s direction, earning the business a narrow moat rating in March 2021. David Meats, Morningstar’s director of equities research, energy, and utilities, said that Hess can achieve both substantial growth and good capital returns because of these assets.
Despite the company’s stellar track record, Meats believes the oil and gas producer is among the most overvalued firms on Morningstar’s coverage list since it is now trading at a 64% premium to his $88 fair value assessment.
“We think the good news has already been taken into account. Furthermore, the market seems to have higher expectations for commodities prices in the future than we do. While we both think that prices will stay high until 2023 at the latest, our long-term prediction for Brent’s oil price is now $60 per barrel. He projects that the oil futures strip will not drop below $70 until 2030, even though it is backhanded (oil futures prices are often lower than actual oil market prices).
Dick’s Sporting Goods
- Morningstar Rating: 2 Stars
- Price/Fair Value Ratio: 1.57
Dick’s Sporting Goods’ stock is now selling for 57% more than its estimated $82 fair value. David Swartz, Senior Equity Analyst at Morningstar, describes the sporting products company’s growth as “anomalous.” For the fiscal year that ends in January 2022, operating margins more than doubled, from 7.7% to 16.5%.
While the company’s sales over the last two years have been rather strong, Swartz contends that a slowdown is expected since external competition has historically restrained the expansion of the sports goods retail industry. Operating margins have already started to fall as of October 31, 2022, with a trailing 12-month result of 13.4%.
Furthermore, he states, “Activewear industry inventories remain high, necessitating more markdowns than currently assumed.”
Old Dominion Freight Line
- Morningstar Rating: 1 Star
- Price/Fair Value Ratio: 1.52
Old Dominion Freight Line is regarded by senior stocks analyst Matthew Young of Morningstar as “the clear industry leader in terms of execution, freight selection, and service quality.” Furthermore, the company’s profitability is “materially higher than that of any of its publicly traded competitors.” Because of this, it usually trades at a substantial premium to its competitors.
Since freight demand and price projections have worsened, trucking companies’ stock values have generally begun to drop. Despite this, Old Dominion Freight Line’s stock remains one of the most expensive in Morningstar’s U.S.-listed coverage list, trading at a 52% premium to its $201 fair value estimate.
“It seems that the market doesn’t agree with our estimate for the midcycle margin. According to Young, we take a more conservative approach because LTL shipping is a seasonal and price-sensitive market, not because of execution.
Cintas
- Morningstar Rating: 1 Star
- Price/Fair Value Ratio: 1.51
Joshua Aguilar, a senior equity analyst at Morningstar, estimates that the stock of Cintas, the biggest uniform vendor and renter in the US, is overvalued by almost 51% when compared to its estimated $292 fair value. Aguilar believes that even though the firm has been showing good results—revenue increased by 10.4% in the fiscal year 2022, operating margins increased marginally to 20.2% from 19.5% in 2021—the recessionary pressures and rising energy costs will hinder the company’s development. According to him, almost 40% of Cintas’ energy expenses come from the rising rates of electricity and natural gas.
There is also starting to be more competition. Although Cintas claims that its products and services are of a higher caliber, we don’t think they are really “better enough” to compete.
Because of the significant association between the company’s principal uniform services business and U.S. employment trends, Aguilar classifies the sector as “highly cyclical,” which may have a detrimental effect on the company’s profitability in the event of a recession.
“Management confidently claimed that Cintas has been able to bring in new business clients during previous recessions because the value it offers customers has remained robust” during a conference call to discuss profitability. But we are not as optimistic, says Aguilar, considering the uncertainties surrounding the length, scope, and effects of a potential recession in the US and global economy.
