When it comes to investing, I think we can all agree that the name of the game is to make money. Why else are we here? A good step toward that goal is to avoid overvalued stocks.
In short, overvalued stocks are those whose price exceeds the company’s near-term earnings outlook, or its price-to-earnings (P/E) ratio. P/E is a method for measuring a stock’s value in relation to its forward earnings per share.
When a stock is overvalued, then it’s more likely that its price will take a fall. And that’s something that no investor wants to see.
To look for overvalued stocks, we ran a screen for companies with an abnormally high P/E that also fell in stock price over the last 12 months.
Here are seven overvalued stocks that made my list of equities to dump like analysts and investors have been:
- T-Mobile US (NASDAQ:TMUS)
- Match Group (NASDAQ:MTCH)
- Etsy (NASDAQ:ETSY)
- Wayfair (NYSE:W)
- Zoom Video Communications (NASDAQ:ZM)
- The Trade Desk (NASDAQ:TTD)
- Alarm.com Holdings (NASDAQ:ALRM)
Overvalued Stocks to Avoid: T-Mobile US (TMUS)
1-year return: -22%
Forward P/E ratio: 32.4
T-Mobile is the No. 2 mobile carrier in the U.S. after its successful merger in 2020 with Sprint. And with the 5G rollout across the country, you’d think that TMUS stock could be poised for some big gains.
But that hasn’t been the case. T-Mobile lost nearly 15% in 2021. And its forward price-earnings ratio is badly inflated when compared to its competitors. Verizon (NYSE:VZ) has a forward P/E of only 9.3, and AT&T (NYSE:T) is just 7.
AT&T is also outpacing TMUS in adding new customers. In the December quarter, AT&T added 880,000 postpaid phone subscribers, beating analysts’ expectations of 804,000. T-Mobile, meanwhile, added 844,000, which was below analysts’ estimates of 854,000.
Morgan Stanley analyst Simon Flannery lowered his company’s price target on TMUS stock from $152 to $149 while maintaining his “overweight” rating.
Match Group (MTCH)
1-year return: -19.6%
Forward P/E ratio: 32.6
Match Group is working on cornering the market on the online dating scene. In addition to its flagship Match platform, it also operates OKCupid, PlentyOfFish, OurTime, Pairs and more.
As people are keeping to themselves more often during the Covid-19 pandemic, online dating seems to be more popular. A recent survey by Bumble (NASDAQ:BMBL) indicates that two in three Americans believe that it’s possible to fall in love with someone before meeting face-to-face.
Match Group had a big 2020 as the pandemic struck in full force. But the stock pulled back in 2021. It missed analysts expectations in the second quarter by earning 46 cents per share when the Street expected 51 cents.
It followed that up with another miss in the third quarter, and then posted weakened guidance for Q4.
Piper Sandler analyst Matthew Farrell recently initiated coverage on MTCH stock with an “overweight” rating and set a price target of $160.
Overvalued Stocks to Avoid: Etsy (ETSY)
1-year return: -26%
Forward P/E ratio: 59.5
Etsy operates an online marketplace that specializes in handmade products. If you want custom shoes, clothes, jewelry, trinkets or accessories, Etsy is likely the source for you.
But the stock looks like it could use a makeover of its own. Down nearly 50% from all-time highs of $300, Etsy dipped by over 25% over the last 12 months.
The company managed an earnings beat in the third quarter, posting revenue of $532.4 million that beat analysts’ estimates of $518.5 million. Earnings per share (EPS) was 62 cents.
It issued guidance for the fourth quarter that includes revenue of between $660 million and $690 million, which would indicate roughly 10% growth from the same quarter in 2020.
Analysts are waving red flags because of continued economic weakness that could hurt Etsy stock. Stifel analyst Scott Devitt lowered his firm’s price target from $265 to $230, while BTIG analyst Marvin Fong dropped his target from $260 to $230.
Wayfair (W)
1-year return: -50%
Forward P/E ratio: 54.4
In another nod to the online retail market, my pick on the list of overvalued stocks is online home furnishing store Wayfair. The Boston-based company also operates websites under the Joss & Main, AllModern, Birch Lane and Perigold brands.
W stock suffered in a big way in 2021, with the most recent (Q3) report just another straw on the suffering camel’s back. Revenue of $3.1 billion came up short of analysts’ expectations of $3.24 billion. EPS was a pleasant surprise, at least, as the company earned 14 cents per share. Analysts had only expected a penny.
But more troubling is that revenue fell 19% on a year-over-year basis, as Wayfair is facing some huge comparable quarters from the 2020 pandemic.
“Demand and interest in the home remains resilient, but it will take a few more quarters for our growth – and e-commerce growth in general – to get back to normal,” CEO Niraj Shah said.
Citigroup cut its price target of W stock from $225 to $200 and set a “sell” rating.
Overvalued Stocks to Avoid: Zoom Video Communications (ZM)
1-year return: -59%
Forward P/E ratio: 40.5
If there’s any company that became a household word since the Covid-19 pandemic began, it’s Zoom. The company’s video conferencing platform became synonymous with the pandemic’s stay-at-home reality.
Zoom pretty much became a verb at many companies and schools across the country, as in, “Let’s Zoom at 2 p.m.”
ZM stock went along from the ride. It traded at less than $60 before the pandemic, and jumped as high as $550 by the fall of 2020. No wonder investors piled on.
But Zoom is struggling now as more people are getting vaccinated and vast majority of schools continue to offer in-person learning. ZM stock is down to less than $160.
Third-quarter earnings actually beat analysts’ expectations, coming in at $1.05 billion in revenue and $1.11 in earnings per share.
But the company is also suffering from a slowdown in revenue growth and has huge quarterly comparisons to beat. That’s going to continue to drag down ZM stock.
The Trade Desk (TTD)
1-year return: -16.5%
Forward P/E ratio: 103.1
The Trade Desk provides advertising services for companies that want to promote their businesses online. It has a demand-side platform that allows its customers to operate programmatic advertising campaigns.
Its stock went up in a big way in 2020 and early 2021, and the company even completed a 10-for-1 stock split.
Over the last five years, the stock is up by more than 2,000%. But on the other hand, it’s likely that the stock price is now ahead of the company’s operating performance.
With a forward P/E of more than 100, it’s certainly justified to be concerned about TTD stock.
Overvalued Stocks to Avoid: Alarm.com Holdings (ALRM)
1-year return: -23%
Forward P/E ratio: 39.5
Headquartered in Tysons Corner, Virginia, Alarm.com is a mid-cap company that provides security, video monitoring and energy monitoring through its cloud-based services.
Total revenue for the third quarter was $192,300, a 21% increase from the same period a year ago. But diluted earnings per share plunged, falling from 71 cents per share in the third quarter of 2020 to 26 cents per share in the third quarter of 2021.
On the plus side, ALRM raised its projected 2021 full-year EPS to a range of $1.87 to $1.88 from a range of $1.77 to $1.79.
But that didn’t keep Roth Capital analyst Darren Aftahi from dropping his price target from $120 to $105. He said while he’s keeping a “buy” rating on ALRM shares, he says the “stay-at-home” premium for many stocks is now off the table.
On the date of publication, Patrick Sanders 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.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.