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2 ‘overpriced’ stocks that could do serious damage to your portfolio

Image: Bunzl: Fair use

While buying high-quality companies is a sound investment strategy, overpaying for shares is not usually a wise move. Certainly, their share prices may continue to rise, but paying over the odds for any stock could lead to disappointing investment performance in the long run. With that in mind, here are two stocks reporting on Wednesday which may be worth avoiding at the present time.

Solid performance

Distribution and outsourcing group Bunzl (LSE: BNZL) gave us a solid trading statement. It showed its trading has been consistent with expectations at the time of the recent annual results announcement. The company’s revenue increased by 18% in the first quarter of the year at actual exchange rates, while it was 4% higher at constant exchange rates. However, of this 4% growth, around half was organic and the remainder came from the positive impact of acquisitions.

Looking ahead, further acquisitions appear to be on the horizon. Bunzl’s level of purchase activity has increased during the current year, with five buys announced for a total committed spend of around £260m. With the company’s cash flow and balance sheet being strong, more M&A activity looks set to take place over the medium term.

Despite this positive update and outlook, Bunzl appears to lack capital growth potential. The company trades on a price-to-earnings (P/E) ratio of 20.8 and yet is forecast to record a rise in its bottom line of just 5% per annum over the next two years. This indicates that it may be a stock to avoid until a more attractive valuation is on offer.

A return to form

The update from provider of engineering data and design IT systems Aveva (LSE: AVV) showed that the company has made a return to form. When the positive effects of currency translation are factored-in, its revenue and profit returned to positive growth in the financial year to 31 March. The company therefore anticipates that its results will be in line with expectations and that cash generation will surpass previous guidance. It expects to close the year with around £130m in cash.

Clearly, this is positive news for the company’s investors and it would be unsurprising for Aveva’s share price to move higher in the short run. However, as a long-term investment it seems to be somewhat disappointing. It trades on a P/E ratio of almost 30 and yet is expected to record a rise in its bottom line of just 9% in the current year and 7% next year. Although such growth rates are ahead of the wider index, they appear to be insufficient to justify such a heady valuation.

Looking back, Aveva has experienced a successful year. Its share price has risen by 19% in the last 12 months. But due to such a high valuation, it is difficult to see this level of performance being repeated in the next year. As such, other FTSE 350 stocks may hold more enticing investment outlooks at the present time.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.