Stocks may still be in the grip of a bear market, but there are still overpriced names to avoid.

As of January 9, 2023, 15%, or 130, of the 847 U.S.-listed equities monitored by Morningstar analysts were deemed overpriced, with a Morningstar Rating of 1 or 2 stars. A year ago, around 30% of equities, or 253, were overvalued when compared to the fair value estimate established by Morningstar stock experts.

Overpriced stocks are common in certain industries, such as utilities, where 46% of Morningstar’s coverage is overvalued and another 43% is at fair value.

Overpriced stocks are notably scarcer in other sectors, such as communication services and real estate, with only 4% of communication services stocks and with 5% from the real estate sector considered expensive.

We performed a simple screen that ranked all 847 U.S.-listed stocks by their price/fair value ratio, a data point that divides a stock’s price by its Morningstar fair value assessment, to determine the most overvalued equities covered by Morningstar.

Stocks with ratios greater than 1.0 are considered overvalued, while those with ratios less than 1.0 are considered undervalued.

The five most overvalued names on our list of US-listed coverage are:

Education Group TAL

Following painful losses in 2021 as a result of Chinese legislation restricting for-profit academic tutoring in the country, Chinese private education services provider TAL Education Group saw its shares jump and become one of the best-performing equities of 2022.

Morningstar equities analyst Cheng Wang attributes the rally to “market speculation of a policy shift on K-9 academic after-school tutoring given the Chinese government reversed direction on the real estate industry and lifted regulation on the tech sector.“

That rise propelled TAL Education from one of the most undervalued companies in early 2022 to one of the most overvalued stocks in 2023, selling at a 65% premium to its $5.60 fair value estimate.

Wang believes that the anticipated tailwinds from a prospective shift in China’s after-school tutoring policies are unjustified.

Although Wang believes that China’s regulatory environment will be more favorable to private education providers as a result of the government’s shift to an economic growth mindset, he believes that policies prohibiting for-profit K-9 academic tutoring are unlikely to be relaxed as they have been in the technology and real estate sectors.

“After-school tutoring is significantly less vital to China’s economy than real estate,” he claims.

TAL Education has also already restructured its business to focus on nonacademic tutoring, learning material, and learning technology, and has spun off its K-9 academic tutoring division.

“Even if regulations are relaxed, TAL will not benefit unless the government permits the company to become profitable again.”

Hess

The shares of oil and gas firm Hess doubled in 2022, reaching 94.1%. Higher oil prices helped boost operating margins to 33.1% in the third quarter of 2022, up from 22.8% the previous year.

Investors also praised the company’s efforts to cut expenses, contributing to broader profits.

“Hess has done a great job restructuring the portfolio in the previous few years, pivoting to low-cost resources in the Bakken and Guyana that gained it a narrow moat rating in March 2021. With these assets, Hess has the ability to offer strong capital returns alongside significant growth,” says David Meats, Morningstar’s director of equity research, energy, and utilities.

Despite the company’s strong success, Meats feels it is one of the most overpriced stocks on Morningstar’s coverage list, selling at a 64% premium to his $88 fair value estimate.

“We believe the good news has already been factored in. Furthermore, the market appears to be more optimistic about long-term commodity prices than we are. We agree that prices will continue high at least until 2023, but our long-term crude projection remains at $60 per barrel [for] Brent. Even though the futures strip is backward dated [prices for oil futures are normally lower than recent oil market prices], he believes it will not fall below $70 by 2030.”

Dick’s Sportswear

Dick’s Sporting Goods shares are trading at a 57% premium to their estimated fair value of $82.

Morningstar senior equities analyst David Swartz describes the sporting goods retailer’s expansion as “anomalous.”

Operating margins have more than doubled from 7.7% in 2021 to 16.5% for the fiscal year ending in January 2022.

“Despite its very high sales over the last two years, we feel a decline is likely, given the growth in sporting goods retail has traditionally been small owing to external competition,” Swartz adds.

Operating margins had already begun to decrease, with a trailing 12-month value of 13.4% as of Oct. 31, 2022.

“Moreover, stocks in the activewear business remain high, which may need larger markdowns than currently anticipated,” he warns. Margins would continue to be squeezed as a result of markdowns.

ODFL

Old Dominion Freight Line is a less-than-truckload (LTL) carrier that Morningstar senior equities analyst Matthew Young considers to be “the clear market leader in terms of execution, freight selection, and service quality. In addition, the company is much more lucrative than any of its publicly traded contemporaries.” As a result, it tends to trade at a significant premium to competitors.

In general, stock values for trucking businesses have begun to fall in recent months as forecasts for freight demand and pricing have weakened.

Still, at a 52% premium to its $201 fair value estimate, Old Dominion Freight Line’s stock is one of the most overpriced in Morningstar’s U.S.-listed coverage list.

“I believe the market disagrees with us on our midcycle margin prediction. We adopt a more conservative approach not because of execution, but because LTL shipping is a cyclical, price competitive market,” Young explains.

Cintas

According to Morningstar senior equity analyst Joshua Aguilar, shares of CTAS, the major provider of uniform rentals and sales in the United States, are around 51% overvalued relative to its $292 fair value estimate.

While the company has reported solid results, with sales increasing 10.4% in fiscal 2022 and operating margins increasing to 20.2% from 19.5% in 2021, Aguilar expects recessionary pressures and rising energy costs will stifle growth. “Natural gas and electricity, which are rising in price, account for roughly 40% of Cintas’ energy expenses,” he explains.

Competition is also increasing. “While Cintas claims that its products and services are of higher quality, we remain unconvinced that its offerings are ‘better enough’ to compete with other industry competitors.”

A recession might also harm the company’s performance, which Aguilar considers “extremely cyclical” due to its primary uniform services industry being directly linked to employment trends in the United States.

“Management indicated with confidence that Cintas has been able to recruit new business clients during prior recessions because the value it gives to customers stays strong,” according to an earnings call.

“However, given the uncertainty surrounding the length, severity, and aftereffects of a prospective recession in the United States and the global economy,” Aguilar argues.

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