While the fact that the FTSE 100 is within 5% of its all-time high does not necessarily mean that it is overvalued, there are a number of stocks within the index that appear to offer poor value for money. Of course, this does not mean that they are low-quality businesses or that they are badly run. It simply means that their share prices and valuations seem to be excessive and, for investors looking for either a lucrative income or impressive capital gains, there are better options elsewhere.
A notable example is BT (LSE: BT.A) (NYSE: BT.US). There is currently a buzz surrounding the company as it has recently transitioned from landline and broadband provider to quad play operator, with a very appealing pay-tv and great value mobile phone offering now in operation. Furthermore, its proposed takeover of EE would create a major player in the mobile market and allow BT even more scope to cross-sell its products to a new set of customers.
However, while BT does have a bright long term future, its current valuation appears to be too high. For example, it currently trades on a price to earnings (P/E) ratio of 15.7 and, looking ahead, there could be a number of challenges ahead for BT.
Firstly, the EE deal may be blocked by the regulator, which has voiced concerns over BT’s control over the telecoms and media market. Secondly, BT’s balance sheet is not particularly strong, with a large pension liability meaning that a rights issue may be required if the EE deal does come off, while thirdly, BT is giving away many of its products at very low prices, which may not be healthy for its margins.
Similarly, ABF (LSE: ABF) also offers poor value for money. Its Primark division has been a superb performer in recent years, but with the UK economy improving and disposable incomes rising in real terms, shoppers may choose to move away from discount stores and return to the purchase of higher priced brands. As such, ABF’s future performance may be hurt somewhat, while a continued supermarket price war may also cause its margins to be suppressed somewhat. And, with ABF trading on a P/E ratio of 32.6 despite its profit being set to fall by 6% this year, it appears to be hugely overvalued.
Meanwhile, Relx (LSE: REL), formerly called Reed Elsevier, has seen its share price soar by 115% in the last five years. However, it now looks richly valued, with it having a P/E ratio of 18 despite its growth prospects being roughly in-line with those of the wider index. In fact, Relx has a price to earnings growth (PEG) ratio of 2.4, which indicates that its medium term prospects may already be priced in. As such, its share price could come under pressure moving forward, thereby making now the right time to sell and invest elsewhere.
