One of the most effective ways to generate high returns when investing is to avoid overpaying for shares. This is, of course, easier said than done.
At the present time, for example, the stock market is still relatively high despite its recent pull-back. Therefore, there are a number of stocks which appear to be overvalued and that offer narrow margins of safety. Those companies could lead to capital losses for new investors and avoiding them could lift the performance of an individual investor's entire portfolio.
With that in mind, here are two stocks that could be worth avoiding at the present time. Both appear to be overvalued based on their profit forecasts.
Reporting on Tuesday was subscription-based vehicle tracking specialist Quartix(LSE: QTX). It released a trading statement that showed it is on track to deliver on management expectations for the full year. It has made progress in its core fleet business in the US and France since the start of the year. New installations in those countries in the first quarter of the year are due to be 60% ahead of the same period in the prior year.
The company's strategy has contributed to its improved performance. And while there are pricing pressures across the insurance telematics market, they are not expected to have a material impact on its first-half results. In the second half of the year, however, it anticipates that insurance volumes could come under pressure. This is likely to be why its shares have moved 6% lower after the update.
Despite its lower stock price, Quartix continues to trade on a price-to-earnings growth (PEG) ratio of 6.5. Given the challenges it is seeing in some of its markets, this seems to be an excessive valuation. As such, it could be a stock to avoid at the present time.
Also offering a valuation which is stunningly high at the present time is IT infrastructure specialist Softcat(LSE: SCT). The company has a solid track record of growth, with it having increased its bottom line by between 9% and 15% in the last two financial years. This rate of growth is expected to continue in the next two years, with its bottom line forecast to rise by 12% this year, followed by 8% next year.
While the company's rate of growth is relatively impressive, it appears as though investors have become overly optimistic about its investment potential. The stock trades on a price-to-earnings (P/E) ratio of around 28, which suggests that it is grossly overvalued at the present time.
Certainly, we are in the midst of a positive period for the stock market. While there has been a pull-back of late, growth in recent years has been exceptionally high. However, even putting Softcat's valuation into perspective suggests that it could offer limited capital growth. As such, it could be the right time to sell it, rather than buy it.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Quartix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.