I recently took a broad, comprehensive look at companies with market caps over $1 billion. My review included analyzing future cash flow, price-to-sales ratios, earnings forecasts and stock appreciation over the last five years.
Based on these measures, I've identified fifteen large cap companies that I think are the most overvalued in terms of their current stock prices. Below is the list, including links for more detailed analysis:
JC Penney (NYSE:JCP). The stock of this iconic American discounter has nearly doubled in the past two years. But sales remain mediocre and lately the stock has started to waffle.
Schlumberger Limited (NYSE:SLB). Its stock is up 200% over the past five years while customer ExxonMobil Corporation (NYSE: XOM) is up only 100%. It has done very well, but it is in a cyclical industry that is pegged to oil prices and it' run may not last forever.
Merck & Co (NYSE:MRK). This once down-trodden name now trades near its 52-week high. But the drugs that represent 50% of its revenues go "off patent" soon. And Merck still faces major Vioxx liabilities.
AT&T (NYSE:T). This stock is at a four-year high at the same time that the competitive threat from cable only grows more fierce. Consumers are getting used to the idea of buying phone service from their cable companies and suddenly VoIP isn't so scary anymore. That spells trouble for AT&T.
Cablevision. Cable is a great business these days, but this company has poor custodians in the Dolan family, the controlling shareholders. Plus, Digital TV, a major growth engine, is nearing saturation.
Starbucks (NASDAQ:SBUX). It has a sky-high price-earnings ratio -- now over 50. Plus it faces twin risks of a downturn in consumer spending and market saturation.
Apple Computer, Inc. (NASDAQ:AAPL). Sure, it keeps going higher than anyone expects. In fact, the stock has almost doubled in last few months. But that doesn't change the fact that it still faces competition from Microsoft and royalty pressure from content partners.
Google Inc. (NASDAQ:GOOG). How's this for a run-up? The stock went from $85 to $500 in just over two years. But now it confronts rights issues with book and newspaper companies. Plus, I predict an Internet ad slowdown will hit it soon.
Sun Microsystems (NASDAQ:SUNW). The stock has rebounded this year thanks to revenue increases that mostly come from acquisitions. Will it be able to grow organically while fending off huge competitors like International Business Machines Corp. (NYSE:IBM) and Hewlett-Packard Company (NYSE:HPQ)?
Polo Ralph Lauren. My main worry: Its single controlling shareholder has been selling. Plus, two of its largest customers have merged and could push for better pricing.
Phelps Dodge (NYSE:PD). The company is being bought by Freeport McMoRan (FCX), but the value of cooper is now dropping, which could hurt earnings. And many investors wonder if this merger will really happen.
Franklin Resources (NYSE: BEN) The stock of this mutual fund company is up from $29 in late 2003 to $110 currently. But recently some brokerages have started to downgrade the shares and the price-to-sales ratio is well above the competition.
ConAgra (NYSE: CAG). It's a big company, but not a market leader in its space. Most of its brands are No. 2 or No. 3 in their markets. Revenues were up only 1% in the last quarter.
Nvidia Corp. (NASDAQ: NVDA). Its revenues are tied to personal computers and PlayStations. Now PC sales slowing and PlayStation has lots of competition. Plus it is facing an antitrust probe from U.S. Justice Department, which is never fun.
Manulife Financial (NYSE: MFC). I worry that recent acquisitions could dilute its earnings. UBS has concerns as well. The firm recently cut its target price on the stock.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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Reader Comments (Page 1 of 1)
12-07-2006 @ 2:56PM
superbaka said...
Apple is one of the most overvalued companies? Do you even know how to do basic financial analysis? Your post has to be the least educated argument I've ever heard against Apple.
12-07-2006 @ 1:21PM
Tommo_UK said...
Re: AAPL: being overvalued
"Pressure from Microsoft?" hahahahaa.. yeah, 1m Zunes sold by June 2007 is going to have a HUGE impact on Apple, who will have sold another 30m iPods by then, minimum.
"Pressure from content partners?" How exactly does that affect AAPL's earnings anyway? AAPL doesn't make more than a few cents from digital downloads. They make money off the hardware.
Doug, when it comes to AAPL, I'm afraid you're a bit clueless.
12-07-2006 @ 3:20PM
Rohit said...
OOoooo all the Apple fanboys are angry. I would love to see the IQ level of the fan boys.
I love it when one of these article comes out and all the iFanboys start to cry.
Its really funny
12-07-2006 @ 7:25PM
Peter said...
Apple is coming out with the iPhone, iTV, widescreen iPod etc which will drive earnings. Apple's stock will go up through the next year.
12-08-2006 @ 10:38AM
August said...
Opinions abound... Yours AND the investors who have run up the stock price of the companies you mention. However, I can find no basis in which to believe the market is as mindless as your post insinuates.
As for the respondent who assails the IQ of "Apple Fanboys," (people who buy or invest in Apple's award winning design, technologically advanced products and incomparable marketing), I wouldn't be at all surprised to discover they are in the top ten percentile of the nation's most intelligent and market savvy investors.
At the end of the day, intelligence provides the ability to discern what value great companies bring to their respective markets. It then becomes only common sense invest in them.
Thanks for listening.
August
12-08-2006 @ 7:30PM
paul turner said...
douglas mc intyre......back of the class...where you belong!!!!!!!!!!!!!!
12-09-2006 @ 9:38AM
Timothy said...
Starbucks? Market saturation?
Maybe in the United States. Starbucks is growing strongly in Germany, just started moving into China; opened its first two stores in Brazil this just month.
The global market isn't even close to being saturated.
12-18-2006 @ 1:39PM
Paul Lalley said...
Man, talk about sticking your neck out. You got guts to take on this crew.
Anyway, Franklin Resources offers a number of safe haven funds ideal for boomers who will soon be living on fixed incomes. Sure, there's Vanguard and Fidelity but I think Franklin will do just fine for those with longer time horizons.
And, I don't think you're clueless.
12-13-2006 @ 3:48PM
Well Read said...
Conagra??? How stupid can you be? This company pays a dividend every single quarter! It owns Wesson, Hunts, Pam, Orville Reddenbacker, Hebrew National and many other huge companies that all make money! They are in every supermarket in the country! Not glamorous, they don't make movies, but steady. Conagra is a GREAT stock!
12-22-2006 @ 4:33AM
Steven Levine said...
See what i posted Dec 13th? Oh genius who has a column... Conagra announced 44 percent quarterly profit increase... its up $1.40 today. Its a great stock!