With many FTSE 100 shares trading at a discount, I’m looking for outliers that I think are overvalued.
A good way to judge if a stock is overvalued is the price-to-earnings (P/E) ratio. This indicates if the share price is realistic in comparison to the company’s earnings. Depending on the industry, the price-to-book (P/B) ratio can also be a good measurement. This metric evaluates if the share price accurately reflects the company’s book value.
I use these metrics to avoid buying overvalued shares that are likely to decrease in value.
It’s not a perfect measurement though, as even shares that are trading above fair value can continue rising. As legendary investor Gary Shilling said, “markets can remain irrational a lot longer than you and I can remain solvent”.
With that in mind, I’ve pinpointed three FTSE 100 shares that I may have hidden value — but that I would avoid buying right now.
RELX
RELX (LSE:RELX) provides decision-making analytics tools to professionals and businesses globally.
With a share price of £32.50, RELX is estimated to be overvalued by 30%, with analysts suggesting a price of around £25 to be more fair.
As a result, RELX has a P/E ratio of 35 times, above the industry average of 32. With £6.65bn in debt and only £3.25bn in equity, its debt-to-equity (D/E) ratio is 204.5%. That’s not ideal.
Since RELX has a high level of operating cash flow, some analysts feel the debt situation isn’t that serious. I’m not so certain myself. In today’s uncertain financial environment, it’s not the kind of balance sheet that makes me want to invest.
If RELX is using debt strategically then I expect to see further growth but for now I’ll hold out for more evidence.
Experian
Experian (LSE:EXPN) is one of the most popular credit scoring companies in the world, offering credit reports, card comparisons, and fraud monitoring.
The Experian share price has risen 9% in the past month, bettering the overall UK market but below the average 17% growth in the UK professional services sector.
Experian has a P/E ratio of 36.7 times, a fair bit above the UK market’s 12.8 times average.
Furthermore, it has a high level of debt and has experienced significant insider selling over the past three months. The COO and executive director reportedly sold £7.2m worth of stock in last month (January 2024).
When employees of the company start dumping their shares, that doesn’t spark much confidence in me.
NatWest Group
The UK banking sector is struggling currently and Natwest Group (LSE:NWG) appears particularly hard hit. Down 28.8% over the past year, the £19bn bank is now trading at an estimated 62% below fair value.
Usually I’d consider this a good opportunity to grab some cheap shares. However, analysts forecast NatWest earnings to decline at an average of 7.5% per year for the next three years.
Combine that with a P/B ratio of 0.5 times and I think NatWest shares are overvalued with little chance of growth soon.
That said, it does have an excellent 7.1% dividend yield with a solid track record of payments, so even with a stagnant share price, it could deliver returns.
