With the S&P 500 dropping 23% year to date, it’s tempting to look for buying opportunities in the market.
But be careful. Even after substantial declines, some stocks are still overvalued.
Morningstar lists four examples of that. These are “four stocks to avoid,” wrote Susan Dziubinski, director of content for Morningstar.com.
“Buying stocks for less than they’re worth is always important for long-term investors, given how unpredictable cash flows can be,” she said. “But it’s even more important during times of economic instability.”
Here are the four stocks:
Mettler-Toledo International (MTD), a laboratory/industrial balances company.
Year-to-date return: negative 35%.
June 17 close: $1,097.80.
Morningstar fair value: $770.
Morningstar moat: narrow.
Morningstar analyst Aaron Degagne offers mostly positive thoughts about the company. “Mettler-Toledo is the global market leader in laboratory and industrial scales and balances and holds a leading position in product inspection,” he wrote in a commentary.
But, “higher inflation could limit earnings growth, since Mettler may find it difficult to pass through price increases above the typical 2%-3% range,” Degagne said.
“Still, the long-term outlook for the business looks healthy, as the firm operates in mature, stable markets.”
Lululemon Athletica (LULU), an apparel retailer.
Year-to-date return: negative 29%.
June 17 close: $278.13.
Morningstar fair value: $216.
Morningstar moat: narrow.
Morningstar analyst David Swartz gives mostly high marks to Lululemon. “We think narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business,” he wrote in a commentary.
“We think product innovation is critical, as many competitors, including no-moat Gap’s (GPS) Athleta, sell women’s leggings of similar quality. Thus, Lululemon will need to introduce new fabrics and technology to hold its popularity in this critical category.”
Shoals Technologies (SHLS) , a solar energy company.
Year-to-date return: negative 19%.
June 17 close: $19.57.
Morningstar fair value: $13.50.
Morningstar moat: none.
Morningstar analyst Brett Castelli has mostly positive comments for the company. “Shoals has crafted a market-leading position within the solar electrical balance-of-system, or EBOS, market,” he wrote in a commentary.
“EBOS is a lesser-known segment of solar and comprises components transferring electrical current from solar modules to an inverter.”
But, “while the company enjoys robust margins and returns on invested capital today, we lack enough confidence that these will persist over the long term to assign an economic moat,” Castelli said.
Old Dominion Freight Line (ODFL), a trucking company.
Year-to-date return: negative 35%.
June 17 close: $232.10.
Morningstar fair value: $195.
Morningstar moat: none.
Morningstar analyst Matthew Young has good things to say about the company. “Following impressive growth over the past decade, Old Dominion is now the fourth-largest U.S. less-than-truckload carrier by revenue and the clear industry leader in terms of execution, freight selection, and service quality,” he wrote in a commentary.
“We wouldn’t hesitate recommending this high-quality transport at an adequate margin of safety to our fair value estimate,” Young said. But, “the lack of an economic moat highlights the need for investors to be mindful of the cyclical nature of the U.S. trucking industry.”
