Half the success of the investment long term consists of identify high-quality companies whose shares are trading at a significant discount to their fair or intrinsic value. But the other half is avoiding those stocks that are overvalued or, in the current case, selling those stocks whose price has risen too high to the point that they have become overvalued and overextended. These are the basic guidelines that Morningstar experts advise in the battle for long-term profitability.
In this regard, Morningstar directors Brian Colello, Damien Conover and Dave Meats, along with analysts Matthew Young and Julie Bhusal Sharma, conducted an investigation and determined that the time had come to divest five US companies trading at levels well above those derived from their fundamentals.
Which are? One is the hess oil company that despite the high quality of its assets and its good growth prospects that make it worthy of a high valuation, it shows that its shares have gone too far compared to its estimate of real value.
For example, there are metrics such as the business value ratio in relation to the gross operating result that yields a rate of 9 times, when its closest competitor is 6 times. For Morningstar a reasonable value actually stands at about 7 times.
The technology stocks have skyrocketed so far this year and Oracle has not been left behind. In fact, Oracle’s shares have risen more than 40% this year to new all-time highs and are now trading at about a 50% premium to Morningstar’s valuation. The company has been performing very well, but there is concern that the long-term upside potential for the cloud infrastructure market is much more limited than the market currently assumes.
Another also from the technology sector is Cadence Design Systems, which is doing very well, posted strong results in the second quarter and, based on the high demand for hardware solutions, management even led to a stronger second half of the year. Contemplating secular trends towards artificial intelligence, 5G communications and cloud computing will actually continue to accelerate, and that Cadence will benefit from both the increasing complexities of chip designs and the increasing complexity of various end markets, despite As a result, the stock is now trading at a premium of about 40% to Morningstar’s valuation, having risen 40% year-to-date.
the fourth is Old Dominion Freight Line, a shipping, logistics and moving company, whose share price could be negatively pressured by reduced retail inventories and a slowdown in US industrial end markets. Old Dominion shares are up more than 40% this year, with most of that gain coming in just the past two months. The reason for that increase is the market’s hope that Old Dominion will gain a significant amount of market share following the bankruptcy of its competitor Yellow Trucking. For Morningstar, the market is overestimating the amount of free cash flow growth over the long term.
The last of the short list is Eli Lilly, whose price has been propelled, among other reasons, by the promising expectations of its Mounjaro drug for type 2 diabetes that helps to lose weight. Morningstar believes that the market is paying too high a valuation for this growth by trading at a premium of close to 50% to its theoretical value.