Are these the 3 most overvalued stocks in the UK?

Harvey Jones looks at three stocks trading at hefty valuations of more than 35 times earnings.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Nobody likes paying over the odds, especially when buying company stocks. The following three are of the most overvalued shares on the FTSE 100, at least according to their current price/earnings ratio. But is there a better story behind that headline figure?

Tesco

Here’s a surprise – recovering grocery giant Tesco (LSE: TSCO) is currently trading at a whopping 63.4 times earnings. This follows four years of tumbling revenues and negative earnings per share (EPS) growth. EPS crashed from 40.31p in February 2012 to just 3.42p at the start of this year. Over the same period, Tesco’s P/E ratio has soared from from a cheap-looking 7.9 times to today’s crazy number.

Clearly all is not lost, with Tesco’s share price up 40% over the past 12 months. Its future is now a lot brighter as management works to slash overheads and tempt back lost shoppers. Its valuation is forecast to fall to 28.1 times earnings next year, and 21.6 times in 2018. That starts to look a bit more sensible if not exactly cheap, given the challenges it still faces in a tough grocery market. With rising inflation set to squeeze shoppers’ pockets and Tesco’s margins, boss Dave Lewis could struggle to make further headway. Rampantly overvalued? No longer. But still a little pricey for my liking.

Vodafone

Mobile phone giant Vodafone (LSE: VOD) hardly looks a great call at today’s valuation of 39.4 times earnings. The share price is trading 14% lower than three years ago. Three out of the last four years seeing negative pre-tax profit is the obvious culprit as growth slows and Vodafone bears the £20bn burden of its Project Spring revamp. However, that’s now mostly complete and the rewards are set to blossom.

Vodafone’s earnings are now on an upwards trajectory, with a record rise of 18% this year and a further 23% forecast in 2016. Better still, while Tesco pays no dividend right now, Vodafone yields 6.5%. Today’s toppy valuation also looks set to retreat, if slowly, to 31.68 next year, to 25.8 in 2017 and to 20.52 in 2018. At today’s low price of 197p, this could make a nice long-term recovery play for income seekers.

Randgold Resources

All that glisters is not gold, especially when it comes with a dazzlingly high valuation. Gold miner Randgold Resources (LSE: RRS) currently trades at 36.7 times earnings, which takes some of the shine off this play on gold. The share price is up 45% in the last year, although at today’s price of 5,990p, it’s well below its 52-week high of 9,820p.

The share price appears to have peaked for now, falling 22% in the last three months. Randgold’s forecast valuation looks more tempting at 19.61 times earnings. But I would say this is a dangerous time to play the gold price, as investors bullishly anticipate a Santa rally and Trump reflationary madness in 2017. Gold is said to be a good hedge against inflation but I reckon stock markets, and dividend stocks in particular, will be the place to be next year. For me, Vodafone’s dividend makes it the winner of these three stocks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »