Even in this range-bound
market, some stocks defy gravity and seem to only want to go up. As
tempting as these rockets seem, that old stock market cliché; “trees
don’t grow to the sky,” still holds true.
With that in mind, here's a
screen for identifying stocks that have probably gone up too far,
too fast, and thus, no matter how tempting, would best be avoided.
User Friendly Stock Screener
As is often the case,
I’ll use the free FINVIZ (finviz.com)
stock screener to describe how you can find them. If you’re not
familiar with the term, a stock screener scans the universe of
stocks for those meeting your selection criteria. Although I’m using
FINVIZ, in many instances you could run the same screen using your
broker’s stock screener.
Select Screener from the FINVIZ
select “All” to see the complete list of available screening filters
(selection criteria). To activate a particular filter, use its
dropdown menu to pick a selection value. We’ll start by identifying
Defining Hot Stock Universe
For starters, we’ll identify stocks that have doubled in share price
over the past 12-months. Do that by using the “Performance” filter
and select “Year +100 percent.” Then, to
assure that we’re looking at actively-traded stocks,
using the average volume filter, specify
“over 100 K” to limit your list to stocks trading more than 100,000
Next, we’ll pinpoint overvalued stocks as gauged by three different
The price/book (P/B) ratio compares the share price to shareholders
equity (book value). Ratios below one reflect out-of-favor
value-priced stocks, while most growth stocks trade at ratios
between one and five. Use the P/B filter menu to specify “Over 5” to
limit your list to stocks considered overpriced by that measure.
In a similar vein, the price/sales (P/S) ratio compares the share
price to trailing 12-months per share. Just like P/B rations, P.S
ratios below one signal value-priced stocks, while most growth
stocks trade at ratios above one, but below five. So, use the P/S
filter and specify “over five.”
While the price/earnings ratio (share price divided by 12-month’s
per-share earnings) is a popular valuation measure, it falls short
for our purposes because the market places higher values on fast
earnings growers than it does on slower growers. The PEG ratio,
which compares P/E to expected earnings growth, is a more realistic
value gauge. Most market players consider a PEG equal to one as
“fair value,” “in-favor” stocks often trade at higher PEGs. Using
the PEG filter, select “Over three,” to
limit your list to clearly overvalued stocks.
Using the search terms I’ve described produced a list of 16
overvalued stocks. Here, with PEGs above 5.0, are the most
• Vicor (VICR) PEG 18.4,
• China Lodging (HTHT) PEG 11.1,
• Baozun (BZUN) PEG 10.5
• Autohome (ATHM) PEG 9.0
• STARR Surgical (STAA) PEG 7.2
• Quidel (QDEL) PEG
More Overvalued Stocks
These stocks, more modestly overvalued, all have PEGs between 3.0
Axon Enterprise (AAXN), Inogen (INCN), ETSY, Inc. (ETSY), TechTarget
(TTGT), Align Technology (ALGN), GrubHub (GRUB), Netflix (NFLX),
Medifast (MED), Canada Goose (GOOS), and Lululemon (LULU).
You can use
this link to see which stocks the screen is turning up today.
This list is intended to identify exceptionally risky stocks.
However, some stocks can stay overvalued for a long time. Use
caution if you’re intending to short these stocks.