With the S&P 500 soaring 18% year to date, it’s inevitable that some stocks are overvalued.
Morningstar’s chief U.S. market strategist Dave Sekera identified four equities that the firm likes for the long term but are now overvalued compared with the firm's fair-value estimates. These are stocks to avoid at present, he said.
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Three of the choices are technology stocks. “The tech sector has moved up so far, so fast that it now trades at about a 10% premium over a composite of our fair values,” Sekera said.
“And there’s the old adage that no one ever went broke taking a profit. Now is a good time to take at least some profits, especially on those names that we think are overvalued.”
Here’s the list:
Nvidia, the dominant semiconductor maker
(NVDA) -)
Morningstar fair-value estimate: $300. Tuesday price quote: $460.
“It’s the poster child for exuberance in the artificial intelligence space,” Sekera said. “In its last quarterly earnings call, it substantially raised its guidance, due to a huge influx of orders for its AI products.”
So Morningstar increased its fair-value estimate by 50% to $300. “I don’t think we’re being overly conservative,” Sekera said. “We’re looking for 50% revenue growth this year” and a tripling of revenue over the next five years.
Oracle, the software stalwart
(ORCL) -)
Morningstar fair-value estimate: $76. Tuesday price quote: $119.
“Oracle’s fourth quarter exceeded expectations on the top and bottom lines,” Morningstar analyst Julie Bhusal Sharma wrote in a commentary.
“The growth rate for its cloud infrastructure business nearly doubled from last year, showing solid health in the nascent business.”
She recently raised her fair value estimate 13% to $76 from $67.
“Nonetheless, our concerns remain for what we believe is a more limited upside to the cloud infrastructure market than what the market is baking in,” Sharma said.
Apple, the electronic-products titan
(AAPL) -)
Morningstar fair-value estimate: $150. Tuesday price quote: $193.50
“Looking at Apple’s last couple of quarterly earnings reports, I don’t think there’s really anything special about their performance,” Sekera said.
“We haven’t had any change in our long-term outlook or investment thesis, yet that stock is up 49% year to date. This might just be a case of the stock catching up with the surge that we’ve seen in those large-cap growth stocks, especially in the technology sector.”
Hess, the oil producer
(HES) -)
Morningstar fair-value estimate: $84. Tuesday price quote: $138.
“There are probably two main differences in our view compared to the market,” Sekera said.
Enterprise value-to-Ebitda, a common metric used in the energy sector, stands at about 9, he said. But the multiple is only 6 for Hess’s closest competitors.
Second, while Morningstar predicts oil supply will be constrained for the short term, supporting current prices, it sees oil prices coming down over the long term, Sekera said.
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