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Avoiding these 2 stocks could help you to build a £1 million ISA

While there are various things that investors can do to improve their chances of becoming an ISA millionaire, avoiding the wrong stocks could be one of the most important. Clearly, this may be regarded as a rather obvious statement to make. However, in every portfolio there are mistakes in terms of the stocks purchased. Avoiding as many of them as possible can improve overall returns.

With that in mind, here are two shares which appear to be overvalued at the present time. Avoiding them could improve your ISA performance in the long run.

Growth potential

Reporting on Tuesday was online grocery specialist Ocado (LSE: OCDO). The company’s trading update showed that it continues to deliver strong growth in the 13 weeks to 4 March. Retail revenue was up by 11.7% to £363.4m, while average orders per week increased by 11.1%. The company operated at maximum capacity for most of the quarter, although its performance was affected by adverse weather conditions in the final week of the period.

The company continues to make progress in improving its volumes, with new distribution centres in the pipeline. Investment in new facilities remains high, with a recent placing for £143m set to be used to facilitate the signing of new Ocado Solutions partnerships on a global basis.

While the company is performing well and moving ahead with its investment plans, it continues to trade on a sky-high valuation. Using next year’s earnings figure, it has a price-to-earnings (P/E) ratio of 2,350. Clearly, its profit is expected to move higher over the medium term. However, with the online grocery market being highly competitive and the prospects for UK consumers being relatively downbeat, it does not appear to be a stock that is worth buying at the present time.

Difficult outlook

Also operating within the retail arena is bakery and food-to-go chain Greggs (LSE: GRG). It faces a challenging future as consumer disposable incomes are falling in real terms. Even though inflation has pulled back recently, it remains ahead of wage growth. This could cause the company’s customers to become increasingly price conscious at a time when its own wage costs and other input costs continue to move higher.

Clearly, Greggs has enjoyed significant success under its current management team. Its strategy has been sound and has enabled growth in earnings to take place in each of the last four years. However, with a price-to-earnings (P/E) ratio of around 17, it seems to be overvalued given its future prospects.

Looking ahead to next year, Greggs is due to report a rise in earnings of 9%. However, even when this is factored-in its valuation appears to be excessive. As such, with the prospects for the UK economy being uncertain, it may be prudent to avoid the company until it can offer stronger growth credentials or a lower valuation.

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Peter Stephens has no position in any of the 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.