Time’s Ticking: Dump These 7 Overvalued Value Stocks

To paraphrase a passage from Ecclesiastes, there’s a time to bump and a time to dump and that brings us to overvalued value stocks to sell. Listen, nobody likes talking about this subject because, psychologically, it’s akin to hurting puppies. And if there’s one thing you don’t do in America, it’s hurting puppies. There will be perdition to pay for such evil and for what it’s worth, I stand by such sentiment 100%.

However, when it comes to the topic of high-risk value stocks, the most important rule for investors is to look out for yourself. Sure, I suppose a certain level of nobility and honor exists in holding the line. But whose line are you holding? Believe me, these C-level suits – you know, CEOs, CFOs, CIOs, etc. – wouldn’t give a you-know-what about dumping hot potatoes on you. So, you should do it first.

Another reason to target value stocks with high risk is the underlying nature of this asset class. By definition, value stocks represent securities that are discounted against some fundamental metric. That lulls investors into complacency. However, it’s important to realize that even value plays can get overheated.

So, look out for number one and avoid overvalued value stocks.

Church & Dwight (CHD)

Including Church & Dwight (NYSE:CHD) on this list of overvalued value stocks to sell pains me because I’ve written positive coverage about CHD before. As a consumer goods giant, the company makes sense, especially under this ambiguous market environment. Also, it used to be great value, providing a modest dividend for your troubles. Unfortunately, it might not be a stellar buy anymore.

Since the start of the year, CHD soared to just under 19%. I think that’s a significant factor to consider because it outpaces the benchmark S&P 500 index, which gained 14.58% during the same period. Also, I’m not seeing the justification for the premium based on its financial performances.

For example, Church & Dwight’s three-year revenue growth rate (on a per-share basis) pings at a modestly positive 8.1%. However, CHD trades at 4.38 times trailing-12-month (TTM) sales, which ranks worse than 87% of its peers. So, unless you see a bullish hysteria for baking soda, CHD ranks among the high-risk value stocks.

Cintas (CTAS)

Headquartered in Mason, Ohio, Cintas (NASDAQ:CTAS) provides a range of products and services to businesses. These include mundane but important items such as uniforms, mats, mops, cleaning and restroom supplies, first aid and safety products, fire extinguishers and testing and safety courses. It’s boring as heck, which traditionally makes it a solid value play. But not anymore.

Since the start of the year, CTAS gained almost 9%. In the trailing one-year period, CTAS soared to nearly 33%. Now, some of the enthusiasm is justified based on the broad push among companies recalling their employees back to offices. However, I’m not entirely sure if the premium makes sense, making it a possible candidate for overvalued value stocks to sell.

For example, Cintas’ three-year revenue growth rate pings at 5.7%, beating out 57.26% of its peers. It’s not awe-inspiring but it’s not bad. However, the market prices CTAS at a TTM sales multiple of 5.87. That definitely is bad. According to Gurufocus, this stat ranks worse than 88.8% of the competition. So, CTAS represents one of the value stocks with high risk.

Equifax (EFX)

Basically the Houston Astros of the business world, I don’t feel bad labeling Equifax (NYSE:EFX) as one of the overvalued value stocks to sell. Yes, I’m referring to the data breach incident. And yes, the incident does live “rent free” in my head, as the kids like to say. Honestly, the matter should live rent free in every Americans’ head.

Anyways, Equifax historically could make an argument as a value play. As a dividend provider and a credit reporting agency, it provides necessary services to the public. Fundamentally, the business offers predictability, which represents one of the hallmarks of a value-based investment. However, after flying over 24% in the trailing year, EFX might be one of the high-risk value stocks.

Specifically, Equifax may offer strong financial stats, with three-year revenue and book growth rates of 13.1% and 14.9%, respectively. However, investors must now pay 31.33 times forward earnings. This stat ranks worse than 87.94% of its peers. Ahead of an uncertain economic environment, you should sell these overpriced value stocks like EFX.

Quanta Services (PWR)

Based in Houston, Texas, Quanta Services (NYSE:PWR) provides infrastructure services for electric power, pipeline, industrial and communications industries. Its capabilities include the planning, design, installation, program management, maintenance and repair of most types of network infrastructure. It’s beautiful, relevant and boring as stink. Traditionally, you would look to something like Quanta Services for discounted value plays.

You’re not looking at Quanta anymore for those discounts. Since the beginning of the year, PWR gained 35% of equity value. In the past 365 days, shares skyrocketed to nearly 57% up. It just continues to move higher and higher. However, at some point, the air will likely come out of this rally, making it one of the overvalued value stocks to sell.

Sure, I get that Quanta enjoys a three-year revenue growth rate of 12%, outflanking 75.73% of its peers. At the same time, it features a sales multiple of 1.62, which ranks worse than nearly 75% of the competition. Also, you’d be paying over 26 times forward earnings, representing an 89% premium over the sector median of 14.01 times.

Rollins (ROL)

A North American pest control company, Rollins (NYSE:ROL) would easily qualify as a value play candidate. Generally speaking, few people enjoy having bugs in the house. At the same time, pest control isn’t exactly a growth industry. According to Fortune Business Insights, the global pest control industry will see a compound annual growth rate of 6.31% between 2020 and 2027. That’s not scintillating stuff.

But now, it’s quite possible that ROL got ahead of itself. Since the January opener, shares gained nearly 14% of equity value. In the trailing one-year period, they’re up almost 22%. Don’t get me wrong, Rollins has expanded, with a three-year sales growth rate of 10.1% beating out 78.12% of its peers. At the same time, you’d be paying 7.43 times trailing sales, which ranks worse than 92.3% of the field.

Also, bear in mind that by acquiring ROL, you’re also paying over 47 times forward earnings. This stat ranks worse than 92.86% of the underlying industry. That’s why ROL may be one of the overvalued value stocks to sell.

COPEL (ELP)

Based in Brazil, COPEL (NYSE:ELP) is an electric utility company. Levered to the exciting Latin America market, ELP admittedly features some growth elements. However, the fundamental nature of COPEL carries a value profile. Utilities generally don’t have exciting growth prospects. Instead, the motif centers on predictability.

Unfortunately, ELP may have gotten ahead of itself. Occasionally, discounted enterprises with predictable businesses become overheated and that’s why you avoid overvalued value stocks. It’s possible that disappointed investors can quickly dump out of shares. Certainly, you don’t want to end up holding the bag on a play like this. Over the past year, ELP gained over 24%, which is a bit rich for a utility trade.

Moving onto the financials, COPEL enjoys a three-year revenue growth rate of 11.4%, beating out 66.67% of rivals. However, investors must pay 109.18 times trailing earnings for the privilege. Also, ELP’s price-earnings-growth (PEG) ratio is 11.14 times, worse than 86.38% of the field. Therefore, it’s one of the value stocks with high risk.

Installed Building Products (IBP)

Hailing from Columbus, Ohio, Installed Building Products (NYSE:IBP) is the premier installation contractor for insulation for residential and commercial builders. According to its website, Installed Building employes over 10,000 workers who serve more than 220 locations nationwide. Under normal circumstances, IBP would historically qualify as a value play for its steady, relevant business. However, circumstances have gotten out of control.

Since the start of the year, IBP gained over 47% of equity value. In the trailing one-year period, shares bounced up nearly 61%. Fundamentally, I’m cautious over the Federal Reserve and its hint that policymakers could raise interest rates. If so, that might kill the housing market and would likely lead to less insulation demand.

To be fair, Installed Building gained handsomely from the Covid-19 crisis, delivering a three-year revenue growth rate of 22.3%. This stat beats out 83.17% of sector rivals. At the same time, investors must pay 16.5 times forward earnings for the privilege. That’s worse than 82.86% of the competition, making IBP one of the overvalued value stocks to sell.

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Source link

Share with your friends!

Products You May Like

Leave a Reply

Your email address will not be published. Required fields are marked *

Get the latest stocks updates
straight to your inbox

Subscribe to our mailing list and get interesting stuff and updates to your email inbox.

Thank you for subscribing.

Something went wrong.

x Logo: Shield Security
This Site Is Protected By
Shield Security