BNN Bloomberg reported in July 2023 that the S&P 500 was overvalued by about 8%, according to Cresset Capital Chief Information Officer Jack Ablin. In the eight months since, it’s up another 19%, providing plenty of overvalued S&P 500 stocks to avoid.
An excellent place to find these overvalued S&P 500 stocks is the Magnificent Seven. The index’s current trailing 12-month (TTM) price-to-earnings (P/E) ratio is 23.6x, while its forward 12-month P/E ratio is 21.6x. A year ago, the S&P 500’s TTM P/E was 18.1, 30% higher. Ablin did say last July that the average stock would probably perform well despite the index’s excessive valuation. That’s changed with the higher P/E.
As of March 5, 2024, the Magnificent Seven’s TTM P/E was 38.5x, 38% lower, while the S&P 500 Equal Weight Index was 20.6x, 16% cheaper than the market cap-weighted version. To make my list of three overvalued S&P 500 stocks, it can’t be one of the Magnificent Seven and it should have a TTM P/E higher than its current ratio of 23.6x.
Axon Enterprise (AXON)
Axon Enterprise (NASDAQ:AXON) has a current TTM P/E of 135.1x and a forward P/E of 76.6x, both considerably higher than the index. The company is best known for its Taser line of smart weapons, used by law enforcement and civilians. However, it also sells body cameras, software and even drones.
Defense stocks are doing okay in 2024. The iShares U.S. Aerospace & Defense ETF (BATS:ITA), which has an AXON weighting of 4.37% (ninth highest in the exchange traded fund (ETF)), is up 6.6% year-to-date (YTD), while AXON stock is up 23.7%.
While there is no question Axon is growing sales- they were up 31% in 2023 to $1.56 billion with 22% projected growth to $1.91 billion at the midpoint of its 2024 guidance- it made just $85.4 million on a non-GAAP basis on its 2023 revenue. That’s a net margin of 5.5%, worse than some grocery store chains. Fortunately, it’s got plenty of cash to keep it going for years, but it’s not worth $24 billion.
Regarding Wall Street, I am clearly on the other side of its valuation. Of the 13 covering its stock, nine rate it a Buy, with a $314.27 target price, about where it’s currently trading.
Dexcom (DXCM)
Dexcom (NASDAQ:DXCM) has a current TTM P/E of 103.2x and a forward P/E of 78.2x, both considerably higher than the index.
The San Dieg0-based company is a manufacturer of continuous glucose monitoring (CGM) systems like the Dexcom G6, the “only integrated CGM (iCGM) that can power automated insulin delivery (AID) systems and provide real-time glucose readings, no fingersticks or scanning required.”
I last recommended its stock in September 2023 when it was trading around $88. I liked the fact that its international business continued to grow. In 2023, its international sales were just under $1 billion, 30% higher than in 2022. They accounted for 28% of Dexcom’s overall revenue, 200 basis points higher than a year earlier.
If you bought in October at its 52-week low of $74.75, you’ve almost doubled your money in less than six months. If you’re a buy-and-hold investor, I wouldn’t sell, but you might consider buying a put option to protect some of your profits.
Analysts love DXCM stock. Of the 25 covering it, 20 rate it a Buy, with a $149 target price, 8% higher than where it’s currently trading. I like the stock, but at 103x earnings, I’d wait for an entry point below $100. Over the past five years, it’s traded below $100 on at least three occasions.
Ecolab (ECL)
Ecolab (NYSE:ECL) has a current TTM P/E of 47.5x and a forward P/E of 35.5x, both considerably higher than the index but only slightly higher than its five-year averages for both.
In May 2023, I included Ecolab in a group of three stocks to buy that the Bill & Melinda Gates Foundation Trust owned. The provider of “water, hygiene and infection prevention solutions and services” was one of two stocks the trust added to in Q4 2022. It owned 5.22 million shares of Ecolab valued at $759.5 million.
Fast forward to Q4 2023. It owned the same shares, but their value at the end of December was $1.03 billion, a return of 32% in 2023. They’re now worth $1.21 billion after just three months in 2024.
Ecolab is worth owning for the long haul. Its mission to solve some of the planet’s most pressing issues is admirable. Although aggressive, its growth goals should be obtainable: 6-8% annual revenue growth and 15% earnings-per-share (EPS) growth annually. However, at 48x earnings, its valuation is nearing an all-time high. Levels like that are not sustainable in a market correction.
On the date of publication, Will Ashworth 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.
