Beware these stocks that have high valuations and may not live up to expectations
Stocks with high valuations are starting to look overextended. The equity market has pulled back since Monday morning, with the major averages on pace for a losing week. But overall, U.S. equities remain in a bull market, as a handful of mega-cap technology stocks lift the market. For example, Nvidia was the only one of the Magnificent Seven to advance this week, gaining more than 7%. The AI chipmaker has already soared 79% in 2024. Still, investors are concerned the recent bull move has left many stocks' valuations overextended, setting them up to fail if lofty expectations aren't met. CNBC Pro searched for stocks that are looking particularly overextended, searching for names trading above their average price-to-earnings ratios, with first-quarter earnings-per-share estimates that have come down from the beginning of the year. Here are the criteria we used: Market cap greater than $1 billion Next twelve month P/E that is greater than the 5 year average P/E Current quarter earnings per share (EPS) estimates down since year began At least five analysts cover the stock Trading more than 5% above analysts' consensus price target These names surfaced on our screen. Mercury Systems , an aerospace and defense company, has a next 12 months price-to-earnings ratio of 191, far above its five-year average P/E of 94, implying the stock is extremely overvalued. Another troubling signal? Consensus estimates for first quarter earnings have declined. In December, analysts anticipated earnings of 52 cents per share. The estimate now calls for a loss of 3 cents per share. Analysts' consensus price target also implies Mercury Systems shares will fall more than 13%. Old Dominion Freight Line came up as an overextended name. The trucking and transportation stock has a next 12 months P/E of almost 34, more than its five-year average below 32. Earnings per share expectations have fallen to $2.71 per share, down from a December estimate of $2.86 earnings per share. Analysts' average price target implies that Old Dominion stock will fall more than 5%. Dollar General also looked overvalued based on our screen. The discount chain sells for about 21 times the next 12 months' estimated earnings, slightly above its five-year average P/E of 20.3. Its earnings per share estimate has declined to $1.85 currently, down from $1.86 at the end of last year, while its average price target suggests a more than 7% fall for the stock from current levels. KLA and Huntington Ingalls Industries also surfaced on our CNBC screen