Just as it’s always a good idea to keep an eye out for the best stocks to buy, it’s also good practice to stay apprised of some of the worst, most overvalued stocks at any given moment. You never know, you might find one of these stinkers lurking around in your portfolio. But how do you spot them? The U.S. News & World Report “Top Performers” list is an easy way to screen for large-capitalization stocks that, like Icarus, have been flying a little too high recently.
Barrick Gold Corp. (ticker: ABX). Shareholders of this gold and copper producer are loving the recent rally in precious metals. With gold rallying from the $1,060 level to upwards of $1,200, ABX shares have more than doubled already in 2016. That’s because Barrick Gold is up to its eyeballs in debt, giving it greater leverage than most peers. That debt, however, has become quite burdensome, and the company has been selling off assets in droves to meet its obligations. It’ll be bittersweet indeed if gold keeps rallying; Barrick produces less and less each year.
[See: 10 Ways You Can Throw Retail Stocks in Your Cart.]
Facebook (FB). Yes, Facebook is one of the most impressive companies in the world. With 1.65 billion users, most of whom use it obsessively, Facebook is an advertiser’s dream. But its valuation is getting out of hand. Just a dozen years after its birth in a Harvard dorm, Facebook is worth more than International Business Machines (IBM) and Cisco Systems (CSCO) combined. Trading at over 15 times sales, investors seem to think CEO Mark Zuckerberg is infallible — usually a dangerous assumption. After all, Shakespeare himself tells us: “to err is human.”
Vulcan Materials Co. (VMC). VMC is a nice way to play the resurgent housing market. The company sells asphalt mix, stone and gravel to construction companies that are thriving with pending home sales at highs not seen since 2006. But at 70 times earnings, VMC stock hasn’t been at these levels in nine years — when the housing bubble burst. In 2007 there were 99 million shares of VMC stock outstanding; today there are 133 million. That makes it tough to rally much higher, especially in a market as cyclical as real estate.
Edwards Lifesciences Corp. (EW). Medical equipment company Edwards Lifesciences has been crushing the market over the last year. The Standard & Poor’s 500 index lost about 1 percent over that time, while Edwards Lifesciences shares rocketed 50 percent higher. Alas, returns like that can’t go on forever, and the outperformance is likely to end soon. EW stock currently trades at 35 times earnings, well above its 10-year median price-earnings ratio of 27.4. In times of euphoria, P/E multiples tend to get out of hand, so it’s best to take the money and run.
[Read: Decoding Wall Street’s Wall of Jargon.]
Alphabet (GOOG, GOOGL). Like Facebook, Alphabet is inarguably one of the most unique and powerful companies on the planet. But Alphabet (formerly Google) is still valued at more than 30 times earnings, despite its overwhelming maturity. The European Union just slapped Google with a second antitrust suit, this one regarding its Android mobile OS. Eighty percent of all smart mobile devices in Europe run on Android, so if Google is forced to cede market share or pay a fine, expect both to be quite painful.
McDonald’s Corp. (MCD). It might sound ridiculous to see another world-famous company like McDonald’s being harangued as a lousy investment, but it certainly seems like Wall Street is a touch too optimistic about Mickey D’s prospects. Shares of the burger chain have roared nearly 30 percent higher in the last year, as the introduction of all-day breakfast helped ignite a turnaround. But that sales gimmick can’t last forever, and its current multiple of 24 is about 30 percent higher than its long-term average, 18.
Campbell Soup Co. (CPB). Founded in 1869, Campbell Soup is an iconic consumer goods company. By the 1960s, Andy Warhol’s obsession with the Campbell Soup can would elevate the brand to become one of the world’s most famous. Unfortunately, you can’t count on ’60s nostalgia to mean much for investors in 2016. This year, revenue is expected to fall 0.8 percent, while next fiscal year it’s actually expected to tick 1.5 percent higher. That doesn’t sound like the type of growth you’d expect from a stock going for 26 times earnings.
Altria Group (MO). Shares of tobacco giant Altria Group have also walloped the market over the past year, surging 28 percent. This brief run-up has put Altria’s P/E ratio in very dangerous territory: At 23 times earnings, MO stock is trading 63 percent higher than its long-term average multiple of 14. But with ever strengthening regulations and consumers smoking less and less, sales are expected to grow by just 3.4 percent this year and 2.4 percent next year. That doesn’t sound like an industry investors should pay a 63 percent premium for.
[Read: 8 Investments Riskier Than Vegas.]
Acuity Brands (AYI). You wouldn’t know that Acuity Brands peddled LED lamps and skylights by looking at its valuation, which is more reminiscent of a cloud computing company than a consumer goods outfit. AYI stock trades for 46 times earnings, roughly twice the valuation of the S&P 500. Acuity Brands is doing well for itself, but its share count has been creeping higher in recent years, rising from 41.9 million in 2012 to 43.8 million currently — a disconcerting trend for a thriving company.
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