The stock market is on a winning streak. A lot of good companies have enjoyed welcome recoveries after 2022’s steep sell-offs. But not all of these moves are as defensible. Indeed, in the case of these three overvalued stocks to sell, investors are taking grave chances owning at today’s prices.
It’d be easy to think that the stocks at risk of overvaluation are only present in a few specific sectors that are particularly prone to momentum trading.
And indeed, there are overvalued stocks in fast-moving fields such as artificial intelligence. But overvaluation can crop up in less glamorous fields as well, as you’ll see with these three stocks to sell before overvaluation causes them to plunge. All three stocks have earned a rare 1-star rating from Morningstar, indicating that shares are grossly overpriced versus fair value today.
A Wingstop (WING) restaurant storefront in Columbus, Ohio.
Source: Eric Glenn / Shutterstock.com
When discussing stock market bubbles, chicken wings probably aren’t the first thing that comes to mind. But Wingstop (NASDAQ:WING) has arguably transformed into one of the most inexplicable overvalued stocks to sell in the market today.
Wingstop has grown rapidly over the past five years driven by its tantalizing sauce flavors, strong presence in the delivery space, and celebrity backers such as rapper Rick Ross.
The company’s story is tremendous. But the valuation may leave investors feeling sick.
Wingstop shares are now going for a jaw-dropping 88 times forward earnings. With earnings projected to grow around 20% per year going forward, that still puts WING stock at 76x and 61x projected 2024 and 2025 earnings respectively. That’s simply too high for a restaurant business, even a top-notch one.
Wingstop shares are up more than 150% over the past year; the stock was at $75 last summer and now it’s approaching $200. This is a mania. Wingstop is a great business. It could be a strong investment after shares cool off. But at these prices, investors will get burned.
Vulcan Materials (VMC)
Image of wet concrete being poured onto a foundational structure
Source: Shutterstock
Vulcan Materials (NYSE:VMC) is a basic materials company. It primarily provides aggregates that go into construction. Think of materials such as crushed stones, sand, gravel. It also produces asphalt mix and cement.
Vulcan is tied to two different primary consumers. The federal government buys a ton of materials from Vulcan to build and maintain highways and other key infrastructure. Meanwhile, the private sector buys things such as cement for building housing and commercial real estate.
Both of these business lines could face strain. Federal infrastructure spending did make it through the debt ceiling standoff unscathed. But now analysts are starting to raise alarms over a potential government shutdown later this year which could derail planned spending. More broadly, with divided government, it will be harder for the Biden Administration to allocate additional funding to infrastructure spending.
On the private sector side of things, a sharply slowing housing market will likely limit demand. With soaring interest rates and a weakening economy, investors should lower their expectations for the construction materials sector.
And yet, VMC stock is up more than 40% over the past year and is now near fresh 52-week highs. This has pushed the P/E ratio above 30. That will be hard to support, especially if the broader economy rolls over.
Old Dominion Freight Line (ODFL)
ODFL logo on the side of a train
Source: Andriy Blokhin / Shutterstock.com
Old Dominion Freight Line (NASDAQ:ODFL) is a leading less-than-truckload cargo operator.
Investors generally associate trucking with volatility and low profitability. It’s not a great industry for long-term returns. However, Old Dominion has bucked this trend by focusing on the less-than-truckload niche. This is a specialty business that allows for higher profit margins and more predictable cash flows from operations.
Historically, ODFL stock has motored along impressively, with shares rising 1,000% over the past decade. But arguably much of the recent growth in earnings was driven by one-time effects from higher-than-usual e-commerce shipping demand tied to stay-at-home shopping during the pandemic.
All this to say that Old Dominion is now going for 30 times forward earnings. That seems like an awfully high price for a trucking company, even a well-run one. As record consumer spending starts to fade and a potential recession looms, ODFL stock could be set for a sharp fall.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
