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10 Expensive Stocks to Steer Clear Of

3 6 1
23.09.2021

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As folksy investing icon Warren Buffett once quipped, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." And as many investors have learned over the years, there's a lot to be said for swooping in to make a long-term investment in a company that has fallen on some short-term bad luck.

The flip side of that philosophy, however, is that investors should also be concerned with avoiding mediocre merchandise that might be overpriced. And while there is always a select group of expensive stocks that can be bought high and sold even higher, investors shouldn't be so naïve as to assume every stock that has had a decent run is destined for continued success.

Many expensive stocks aren't necessarily bad companies. They might not even see difficult times ahead. In many cases, they have simply enjoyed rapid share appreciation in the past few months or years, but suddenly face slowing momentum now that the gains seem to be fully realized.

Here are 10 expensive stocks that investors may want to steer clear of in late 2021. Specifically, these are companies with modest growth estimates but elevated valuation metrics, such as a forward price-to-earnings (P/E) ratio ahead of their peers.

As always, investors should do their own research and only buy the stocks that fit with their personal investing goals.

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Often positioned as one of the "sure thing" stocks on Wall Street, utility American Water Works (AWK, $178.46) has grabbed a lot of attention in the last year or so amid concerns about severe drought conditions in many parts of the Western U.S. However, while the roughly $32-billion company has seen a big run of nearly 40% from its March 2021 lows, it's worth asking the question of whether current investors are overpaying for this stock.

After all, analysts, on average, are only forecasting 7% revenue growth this fiscal year and 6% next year – not exactly jaw dropping numbers.

Part of this is because while American Water Works is a public utility, it is also highly regulated and relies on partnerships with some 1,700 communities in 16 different states. With a diverse group of stakeholders and local requirements, it just isn't possible for this water utility to ratchet up prices dramatically even if it wanted to. Furthermore, water and wastewater infrastructure is expensive to build and maintain, so it's not like AWK is a tech stock that scales easily.

That's what makes the current valuation metrics a bit of a head scratcher. With a forward price-to-earnings ratio of more than 42 and a price/earnings-to-growth (PEG) of more than 5, this theoretically sleepy utility is priced like some small-cap Silicon Valley software companies.

And while some major utility stocks offer dividends north of 3% or 4%, AWK is very lackluster on the income front with 1.4% in annual yield based on current payouts.

None of this is to say AWK is doomed. But new investors should strongly consider the reality of fundamentals before they pay a premium for expensive stocks and get disappointed by future performance.

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Cable One (CABO, $1,915.71) is a mid-sized telecom player that offers voice, data and video connectivity to nearly 1 million residential and commercial customers under services including its Sparklight and Clearwave brands.

With an $11 billion market capitalization and nearly 3,000 employees, CABO is certainly no pint-sized player. And with a forecast for 20% revenue growth in 2021, this is hardly a company that is fading away.

However, it's undeniable that this stock is well behind entrenched players like Comcast (CMCSA) and Verizon Communications (VZ). And there are persistent concerns about competition that investors must acknowledge – as well as the general notion that Cable One is way out of whack with CMCSA and VZ from a valuation perspective.

Consider CABO trades for a forward P/E ratio of nearly 36 and nine times its earnings-to-growth, while Big Telecom mainstay Comcast has a forward P/E of 16 and a PEG ratio of 1.2x. The comparison isn't exactly apples to apples given differences in scale, but it's far enough out of alignment that investors may want to raise an eyebrow when sizing up exp.

And while Cable One shares are down about 10% from their recent high above $2,100 in August, there's plenty of reason to wonder if this stock may still be a bit too overpriced to be worth new money........

© Kiplinger


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