One person’s trash is another’s treasure — but the same is true in reverse, of course! So which stocks do some of our writers think are overhyped and overvalued right now?
JD Wetherspoon
What it does: JD Wetherspoon sells food and drink from 814 pubs across the UK with a focus on value for money.
By Royston Wild. Rapid share price gains since November have left JD Wetherspoon (LSE:JDW) looking too expensive, in my opinion.
Even after last month’s share price slump, the pub operator trades on a meaty price-to-earnings (P/E) ratio of 18 times. Meanwhile, its price-to-book (P/B) ratio comes in at 2.5 times.
Wetherspoons sells beverages and food at lower price points than the broader industry. But this doesn’t insulate the business from trading troubles during lean periods.
March’s poorly received trading update showed like-for-like sales up 5.8% in the seven weeks to 17 March. This was down sharply from the 9.9% rise recorded in the half year to 28 January. Revenues could remain on a downtrend, too, as the British economy struggles for traction.
At the same time, margins remain thin and were just 6.8% during the first fiscal half. Rising costs are a problem across the leisure industry and unlikely to go away any time soon.
Wetherspoons’ disposal of underperforming pubs could give earnings a boost. But for the moment, this is a FTSE 250 share I plan to steer clear of.
Royston Wild does not own shares in JD Wetherspoon.
Judges Scientific
What it does: Judges Scientific acquires and develops companies within the scientific instrument sector.
By Ben McPoland. Judges Scientific (LSE: JDG) is a quality company that I’ve long considered investing in. It has solid returns on capital. But the stock has always appeared too expensive to me.
Looking back though, I probably should have invested. Revenue has increased 75% over five years while operating profit has more than doubled, as has the dividend. The share price has surged 255% in that time and rarely paused for breath.
However, after rising 40% in 6 months as I write (11 April), the stock is trading at 76 times earnings. This means investors have to pay £76 for every £1 of earnings generated by the company last year.
Looking ahead, the valuation becomes a little more palatable at 29 times forward earnings. But I note that forecast revenue growth is 4%-6% for the next three years. That’s not particularly exciting, to be honest, though further acquisitions could boost that figure.
I may still consider investing the next time the market has a major wobble. For now though, the stock looks overvalued to me.
Ben McPoland does not own shares of Judges Scientific.
Nvidia
What it does: Nvidia is the market leader in designing and selling graphics processing unit (GPUs) that are used in advanced artificial intelligence applications.
By Charlie Keough. As I write, the Nvidia (NASDAQ: NVDA) share price is sitting at $870.4. I see that as overvalued.
The stock has been one of the hottest on the market in the last year. However, now trading on 72.9 times trailing earnings, I’m not sure there’s any value left in it for investors. That’s considerably higher than the S&P 500 average of 23.
What’s more, its price-to-book ratio sits at an astonishing 51.3. For comparison, Microsoft’s is just 13.2.
There’s been talks of a bubble and I can see why. The company has been gaining traction and while its share price can’t seem to slow down at the moment, I’m wary of a share price correction.
Of course, I could be wrong. Nvidia has continued to beat earnings expectations in recent times. Analysts predict it to keep performing strongly going forward.
However, I’ll be steering clear of buying more shares today. I’m happy with the exposure I have for now.
Charlie Keough owns shares in Nvidia.
Ocado
What it does: Ocado is an online groceries retailer. And it’s an online retail technology company.
By Alan Oscroft. I don’t know how to value Ocado (LSE: OCDO) shares, with no profit expected for at least three more years.
And the cash is flowing out faster than a receding spring tide. Even by 2026, forecasts suggest free cash outflow of around £350m.
For an online supermarket with annual low-margin sales of around £3bn, a £3.1bn market cap looks too high.
Tesco shifts around £70bn a year, with a market cap of just £20bn. That seems more sensible.
But where I might have it wrong is in Ocado’s warehousing and retail technology. It’s a one-stop shop for companies wanting to set up. And more and more around the world are signing up each year.
And that’s the part I haven’t a clue how to put a rational valuation on.
But, while Ocado is losing money hand over fist, and I don’t know when profits will arrive, it’s overpriced by my standards.
Alan Oscroft has no position in Ocado or Tesco.
Ocado Group
What it does: Ocado is an online grocery retailer that also licenses its technology to others around the world.
By James Beard. Despite reporting an annual profit only three times during its 24 years of existence, Ocado Group (LSE:OCDO) has a market cap of £3.15bn. And even though its share price has fallen more than 70% over the past five years, it remains a member of the FTSE 100.
During the 53 weeks ended 3 December 2023, it made a post-tax loss of £387m.
Using the historic price-to-earnings ratio of Tesco (13.3) as the benchmark for a grocery retailer, Ocado would need annual profit after tax of approximately £235m, to justify its current stock market valuation.
However, many consider Ocado to be a technology stock, believing that the licensing of its automated warehouse solutions will be the key to its future success. And to be fair, it has concluded a few deals with some global retailers.
But its main business is selling groceries which makes me think it’s hugely overvalued.
James Beard does not own shares in Ocado.
The post 5 stocks that Fools think are overvalued appeared first on The Motley Fool UK.
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The Motley Fool UK has recommended Judges Scientific Plc, Microsoft, Nvidia, Ocado Group Plc, and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
