3 Overvalued Stocks to Sell

Key Concepts

• Overvalued Stocks: Stocks whose current market price is significantly higher than their intrinsic or fair value.
• Revenue Yield: The revenue generated per unit of capacity or service.
• Economic Moat: A sustainable competitive advantage that protects a company's long-term profits and market share from competitors.
• Gross Margins: The difference between revenue and cost of goods sold, expressed as a percentage of revenue.
• Fair Value Estimate: Morningstar's assessment of a stock's intrinsic value.
• Telehealth: Healthcare services delivered remotely using telecommunications technology.
• Subscriber Growth: The increase in the number of paying customers for a service.
• Barriers to Entry: Factors that make it difficult for new companies to enter a market.

Stocks Identified as "Sells" by Morningstar Analysts

This summary details three stocks that Morningstar analysts consider overvalued and recommends selling, based on insights from the Morning Filter podcast.

1. Delta Airlines

• Main Topic: Delta Airlines is identified as a stock to sell due to its significant overvaluation relative to its fair value.
• Key Points & Details:
  • Delta Airlines leads the North American market in revenue yield and holds a disproportionately large share of industry profits.
  • The airline's success is closely linked to sustained demand for travel from affluent consumers.
  • While the near-term outlook for US airlines is positive, a return to more normalized operating conditions is anticipated, leading to increased price competition and reduced profitability.
• Supporting Evidence/Arguments: Morningstar's fair value estimate for Delta Airlines is $32 per share, suggesting the current market price is considerably higher.
• Technical Terms:
  • Revenue Yield: Refers to the revenue generated per passenger mile or per available seat mile, indicating efficiency and pricing power.
  • Economic Moat: While not explicitly stated for Delta, its premium positioning and market share contribute to a competitive advantage.

2. Hims and Hers

• Main Topic: The telehealth company Hims and Hers is flagged as overvalued, despite recent strong performance.
• Key Points & Details:
  • The stock has experienced substantial growth in recent years, and the company has consistently reported strong financial results.
  • In the third quarter, Hims and Hers achieved a 49% year-over-year revenue growth.
  • However, the company is observing a slowdown in sequential subscriber growth.
  • Morningstar analysts foresee challenges from low barriers to entry, intense competition, and difficulties in international expansion, which could hinder management's revenue projections.
• Supporting Evidence/Arguments: The stock is considered very overvalued, with a fair value estimate of $25 per share.
• Technical Terms:
  • Telehealth: The provision of healthcare services remotely through telecommunications technology.
  • Subscriber Growth: The increase in the number of individuals or households subscribing to the company's services.
  • Barriers to Entry: Factors such as regulatory hurdles, established brand loyalty, or high capital requirements that make it difficult for new competitors to enter the telehealth market.

3. Walmart

• Main Topic: Walmart, the world's largest retailer, is surprisingly listed as a stock to sell due to its overvaluation.
• Key Points & Details:
  • Walmart's extensive store network and growing digital presence have established a strong and durable economic moat.
  • Despite its competitive advantages, the intense retail landscape is expected to put pressure on gross margins.
  • Morningstar recently reduced its fair value estimate for Walmart as a consequence of these margin concerns.
  • The market appears to be anticipating significant margin improvements, which Morningstar believes are unlikely.
• Supporting Evidence/Arguments: Walmart's shares are deemed "terribly overvalued" relative to Morningstar's fair value estimate of $60 per share.
• Technical Terms:
  • Economic Moat: Refers to Walmart's scale, brand recognition, supply chain efficiency, and omnichannel capabilities that protect it from competitors.
  • Gross Margins: The profitability of Walmart's core retail operations before accounting for operating expenses.

Conclusion

Morningstar analysts have identified Delta Airlines, Hims and Hers, and Walmart as stocks that are currently overvalued. While each company possesses unique strengths, such as Delta's market leadership, Hims and Hers' growth, and Walmart's vast retail network, potential headwinds related to competition, evolving market dynamics, and margin pressures lead Morningstar to believe their current stock prices are not justified by their intrinsic values. Investors are advised to consider these factors and Morningstar's fair value estimates when making investment decisions. For further details on these recommendations, listeners are encouraged to refer to the linked podcast episode and visit Morningstar.com.