After the market rallied to a new record high last week, there is plenty of talk about which overvalued stocks may be in danger zone. The S&P 500 nearly doubles its median price-to-earnings (P/E) ratio of 15, currently at a P/E of 28 times.
With artificial intelligence (AI) driving markets, there is speculation about whether there is a bubble. If so, when will it burst? In such an environment, it’s prudent to determine which stocks have become overvalued and overextended. These may be poised for a reversal or pullback. And there aren’t overvalued stocks just in the AI sector. There are plenty of overextended stocks across the board. Now would be a good time to look at what a selling opportunity could be.
Overvalued Stocks to Dump: Wingstop (WING)
One of the overvalued stocks to dive into today is Wingstop (NASDAQ:WING). WING has soared over 100% in the past six months thanks to double-digit EPS growth and system-wide sales growing for the last twenty years. However, the fast gains are making analysts nervous. Consensus target price stands at $325.19 per share, well below the current price of $350.19. And it’s not just analysts who think the stock is overvalued. The company’s director, Wesley Macdonald, recently announced the sale of 968 shares.
With a P/E ratio of 158 times, WING trades well above the S&P 500 index and the restaurant industry average of 24.5 times. Its price momentum is also higher than the industry average of 47.83, at a 14-day Relative Strength Index (RSI) of 58.31. While Wingstop performs well operationally, its current valuation appears stretched compared to the industry. Investors could consider trimming positions until the share price trades closer to fundamentals and industry peers.
Southwest Airlines (LUV)
Investing in airlines has always been a challenge in getting returns. After reporting an earnings beat in late January, Southwest Airlines (NYSE:LUV) shares and the rest of the stock market took off. But it might be that investors got too enthusiastic, pushing its share price up by 20% in 2024. Brokers have become wary of the high valuation and have suggested reducing holdings of the second pick of our overvalued stocks list.
LUV plunged 15% earlier in the week on the back of disappointing Q1 fuel price guidance and plans to cut down capacity this year. Southwest’s P/E ratio is at 36.99 times, down from 45.8x just a few days ago. However, it is still triple the industry average of 12 times, maintaining an overvalued stock status. In addition, when measured by changes in earnings over investment, the company has worse operating leverage than most companies in the transportation industry.
Ferrari (RACE)
While luxury vehicles may not appear lucrative amid high inflation, Ferrari (NYSE:RACE) has surged 25% YTD at a time when the industry benchmark rose 8%. Its share price recently reached an all-time high, while Piaggio (OTCMKTS:PIAGF) is down. Analysts are concerned that Ferrari has become one of those overvalued stocks that need to be dumped. Among the latest is Citi, which downgraded Ferrari from “neutral” to “sell”. Consensus target price among analysts is below the current price of RACE of $420.38 to $410.55.
Compared to top automakers, Ferrari’s P/E ratio has risen to 55.90x, well above the average of 10x. Some experts argue that high-profile, overvalued stocks could see downward pressure if macroeconomic conditions deteriorate. Ferrari remains a prominent name in the luxury market and retains the potential for stable long-term returns. However, it does need to improve its gross margin, as it has been declining at 1.5% per year. With a 14-day RSI of 61.37 and the industry’s average at 48.41, RACE is considered the last of our overvalued stocks to dump in the short term.
On the date of publication, Stavros Tousios 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.
