New highs, some undeserved
The stock market has overcome what can euphemistically be called a rocky start to the year — and the unexpected ramifications of the Brexit — to hit all-time highs in recent weeks. With interest rates throughout the world still firmly in the gutter, investors everywhere are chasing returns, and that’s been a huge boon for Wall Street. It’s great to see the bull market, now in its eighth year, still going strong. That said, all-time highs also tend to augur something else: overvaluation, at least in pockets of the market. That’s as true today as it ever has been, and these six stocks in particular look overbought.
Shake Shack (ticker: SHAK)
Shake Shack makes a mean burger, and it’s coming to age at a time when fast-casual restaurants are the darlings of Wall Street. Unfortunately, that seemingly auspicious combination has made its valuation frothier than one of its famous shakes. SHAK stock now trades for well over 100 times earnings, which would be excusable if earnings were expected to skyrocket next year. While earnings per share are expected to jump in 2017, the increase from 44 cents to 55 cents doesn’t exactly qualify as “skyrocketing.” That means investors must estimate profitability out to 2018 and beyond to justify the current stock price, which is more than 75 times expected 2017 earnings.
Yanzhou Coal Mining Co. (YZC)
Where to start? Not only is Yanzhou Coal Mining Co. a Chinese coal company at a time when China’s growth is rapidly decelerating, it’s also a coal miner in an era where “dirty” energy sources are being shunned for less pollutive options. Sure, shares of Yanzhou Coal are up about 40 percent in 2016, but by no means does that make YZC stock a buy. In fact, despite its soaring stock price, Yanzhou’s credit rating has been downgraded twice by Moody’s since last November; its current rating, B2, means Yanzhou’s debt is firmly in junk bond category and “highly speculative.” So, appropriately, is YZC stock.
Coca-Cola Femsa (KOF)
Coca-Cola Femsa is Coke’s main Latin American bottler, serving markets like Mexico, Guatemala, Panama and others, while also having operations in countries like Venezuela and Colombia. And while a relatively stable business, KOF still finds itself on the wrong side of growth: Total sales volume fell 0.4 percent in the second quarter, and earnings per share fell by 25 percent. KOF is going up against the same secular problems as its part-owner Coca-Cola Co. (KO) — namely the world is shunning soda for healthier beverages. With shares trading at 31 times earnings despite this lack of growth, shares of the Latin American bottler seem a little bubbly.
Zoe’s Kitchen (ZOES)
Zoe’s Kitchen, like Shake Shack, wooed Wall Street with the “fast-casual” buzzword when it went public in April 2015 at $15 per share. Within four months, ZOES stock would triple, peaking above $46 per share. Since then, shares of the Mediterranean-themed restaurant chain have cooled a bit, but they still trade at more than double their IPO price. Those levels are frankly indefensible: Zoe’s forward P/E ratio rests around 150, making it about eight times as expensive as the average stock in the Standard & Poor’s 500 index, which goes for less than 19 times forward earnings. Zoe’s food may be appealing, but its stock price certainly isn’t.
Cogent Communications Holdings (CCOI)
From a distance, Cogent Communications looks like a solid stock to buy. An internet service provider with over 56,000 miles of intercity fiber-optic cable, it’s built a business with sky-high barriers to entry. Add in a 4.1 percent dividend and consistent revenue growth between 6 and 10 percent, and CCOI stock looks like a conservative investor’s best friend. But get a little closer, and the blotches start to come into focus. CCOI trades at 53 times forward earnings. No insiders have bought stock this year, Raymond James just downgraded shares after a revenue miss and CCOI paid more dividends last year than it made in its last five fiscal years.
Tesla Motors (TSLA)
Last but not least, electric car manufacturer and self-proclaimed sustainable energy powerhouse Tesla Motors is a notoriously tricky company to value. TSLA could either be the steal of the century or an absolute ripoff — but traditional valuation metrics point toward the latter. First and foremost, TSLA has never been profitable, yet the market values it above $30 billion — more than 120 times forward earnings. Its proposed buyout of the debt-ridden SolarCity Corp. (SCTY) has been met with skepticism by Wall Street, and a history of production delays raises questions about its ability to pull off the all-important 2017 launch of the Model 3, upon which much of its lofty valuation depends.
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6 of the Most Overvalued Stocks on the Market originally appeared on usnews.com
