Some permabears may look at this headline and think, “Only three overvalued stocks?” The market as a whole does look overvalued in relative terms. The average price-to-earnings ratio of all the stocks in the S&P 500 index is at 24.7x. That puts it in the overvalued range. Many investors of a certain age can recall a time when a stock was considered overvalued if its P/E ratio was in the double digits. Inflation affects all things, I suppose.
The market’s breadth is thin. Much of the growth comes from a small group of stocks, particularly technology stocks.
Does that mean all stocks, even those with a high P/E ratio, are overvalued? Of course not, but that doesn’t mean this isn’t a time to be selective. Here are three overvalued stocks that will likely have trouble meeting earnings expectations. Since earnings growth is closely tied to stock price performance, investors should exercise caution before taking a position or adding new money to these stocks.
Zoom Video Communications (ZM)
Zoom Video Communications (NASDAQ:ZM) is first on this list of overvalued stocks. However, some investors may point out that it’s objectively not overvalued. I can’t disagree. Even with a forward P/E of around 23x, that’s low by the standards of the computer and technology sector.
But the company isn’t delivering the same results as other stocks in the sector. As our own Ian Bezek points out, top line growth isn’t keeping up with inflation, which is not what tech stock investors want to see. And on the earnings front, analysts are only forecasting 1.4% growth in the next 12 months.
Analysts have a “neutral” rating on ZM stock, but with a price target that suggests the stock is undervalued. That’s likely because they expect growth from the company’s new generative AI offering. But without specifically knowing how this will improve revenue and earnings growth, that feels a bit speculative.
What may be more telling is that Zoom Video Communications stock is down 21% in 2024 and is now trading below its debut price in 2019.
McCormick & Co. (MKC)
Next on this list of overvalued stocks is McCormick & Co. (NYSE:MKC). The company’s forward P/E ratio is 24.1x, which is above the forward P/E average of 19.5x for the S&P 500, as well as the consumer staples sector average of around 20.1x.
MKC stock has already been down 25% in the last 12 months, which may have some investors looking at the stock as a stealth buying opportunity. This is particularly the case for income-oriented investors. McCormick is a dividend aristocrat who has increased its dividend for over 25 consecutive years. That may be a reason to hold onto shares, but this may not be a time to add.
Here’s why. The company is guiding for full-year 2024 sales growth between -1 to 1%. The top end of its earnings forecast would be a 5% year-over-year increase. One headwind for the company is the consumer’s increasing preference for store brands in their effort to save money on their grocery bills. One rate cut isn’t fix that, particularly if it causes inflation to rise.
Sherwin-Williams (SHW)
With a P/E of 32x and a forward P/E of 26.2x, Sherwin-Williams (NYSE:SHW) would have to show exceptional growth to avoid being on a list of overvalued stocks. However, the company’s first-quarter earnings report did nothing to convince investors of that. The company missed the top and bottom lines. Sales met the company’s guidance but at the lower end of its range.
Of course, contrarians can note that past performance can be a poor indicator of future outcomes. However, the housing market remains tight. It also seems unlikely that Sherwin-Williams will be able to match the 20% growth it delivered in the last year, which was aided by Q2 growth of 117%.
In October, I thought the sell-off in SHW stock may have been overdone. But investors are voting otherwise. The company’s 0.95% dividend yield isn’t impressive. But the company is a dividend aristocrat that increased its dividend for 47 consecutive years. That may make the stock worth a “hold,” but right now, this company needs to see stronger economic growth.
On the date of publication, Chris Markoch 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.