By David Trainer via Iris.xyz
Last week we featured three safe stocks to get you through a bear market. This week we’re going in the opposite direction and picking three stocks that have performed well in 2018 but look overvalued as the market grows more volatile.
Advanced Micro Devices (AMD: $20/share), TripAdvisor (TRIP: $62/share), and Advance Auto Parts (AAP: $166/share) are this week’s Danger Zone picks.
Price Increase Leads to Overvaluation
It should come as no surprise that many of the top-performing S&P 500 stocks for 2018 now earn our Unattractive-or-worse rating. Anytime a stock nearly doubles in one year, there’s a good chance it will become overvalued.
Figure 1 shows the year to date (YTD) performance and the price to economic book value (PEBV) for the top three performing stocks in the S&P 500 so far this year. Economic book value represents the zero-growth value of a company’s cash flows, so all three companies have a valuation at least four times higher than their zero-growth value. For comparison, the weighted-average PEBV for the S&P 500 is 2.6.
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