Two 'overvalued' stocks I'd sell in May

The Motley Fool
Investing in the FTSE 100
Investing in the FTSE 100

With the FTSE 100 close to a record high, it is perhaps unsurprising that a number of share prices appear to be overvalued. While this is not the case across the board and there are still bargains for long-term investors, some stocks offer relatively narrow margins of safety. Therefore, their downside risks appear to be greater than their upside potential. Here are two companies which seem to be worth selling, rather than buying, at the present time.


High valuation

Reporting on Friday was global hospitality company Millennium & Copthorne(LSE: MLC). Its first quarter of the year was relatively positive, with revenue per available room (RevPAR) growing by 4.6%. It was driven higher by an increase in occupancy of 2.9% and an average room rate which was 0.3% up on the same period of the prior year. The company also gained a boost from currency translation, with RevPAR up 17.7% on a reported basis.

In terms of its geographic performance, London and New York continued to perform well. A weak pound boosted tourism in the UK, while in New York the completion of the refurbishment of ONE UN New York pushed sales higher. However, in Singapore, RevPAR declined by 0.9% as the average room rate dropped by 6.3%.

Looking ahead, Millennium & Copthorne is expected to record a rise in its bottom line of 9% in the current year. It is due to follow this up with growth of 7% next year. While this is slightly above the index average, the company's shares trade on a price-to-earnings growth (PEG) ratio of 2.4. This suggests that while its performance is improving, the market has already priced-in its medium-term forecasts.

Disappointing outlook

The performance of the defence sector has been rather disappointing in recent years. A combination of austerity and an uncertain economic outlook has meant that defence companies such as QinetiQ(LSE: QQ) have struggled to grow their top and bottom lines.

Now though, the future for the industry is becoming increasingly bright. The Trump administration seems intent on increasing spending on defence, while austerity is gradually being eased across the developed world. This means that the outlook for defence companies is improving. Therefore, investing in the industry could prove to be a sound long-term move.

Despite this, QinetiQ seems to be overpriced and struggling to deliver meaningful earnings growth. For example, in the current year it is expected to record a rise in earnings of just 3%. This is due to be followed by a fall in net profit of 2% next year, which means its bottom line is not due to make any significant gains over the next couple of years. As such, it is difficult to foresee a possible catalyst to push its share price higher.

While the company has a rather downbeat outlook, its shares trade on a high valuation. They currently have a price-to-earnings (P/E) ratio of 18, which suggests they offer little upside over the medium term.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.