With the FTSE 100 trading at just under 7,400 points, it is perhaps unsurprising that there are a number of stocks which appear to be overvalued. Certainly, the prospects for the global economy are relatively upbeat, and earnings growth may be positive in the next few years. However, in some cases there are stocks which offer a mix of high valuations and relatively unappealing outlooks. Here are two companies which appear to offer both of those undesirable traits.
Overpriced growth story
Reporting on Tuesday was bakery and on-the-go food retailer Greggs (LSE: GRG). Its performance in the first half of the year has been encouraging, with the company on track to meet expectations for the full year. Its sales increased by 7.3% as it recorded company-managed shop like-for-like (LFL) sales growth of 3.4%. This was driven by strong growth across a number of business areas including its Balanced Choice meal ranges and hot food choices.
The company’s store opening programme continues, with 19 shops closed in the first half of the year and 61 new shops opened. It expects around 100 net new shops for the full year. It has also rolled out a new central forecasting and replenishment system ahead of schedule, which could make the business more efficient in future.
Looking ahead, Greggs is forecast to post a flat bottom line this year, followed by growth of 7% next year. Despite this somewhat modest growth outlook, it trades on a price-to-earnings (P/E) ratio of 17.9. This suggests it may be overpriced given the uncertain outlook for UK retailers as rising inflation puts pressure on disposable incomes. Therefore, it seems to be a stock to avoid given its lack of a margin of safety.
Lack of growth
Also trading on a high valuation given its growth outlook is Dairy Crest (LSE: DCG). It is expected to report a rise in its bottom line of 5% in each of the next two financial years. This is a lower figure than the expected growth rate of the wider index, which would usually mean a lower valuation would be applied by the market. However, in this case the stock has a P/E ratio of 15.8. When combined with its growth rate, this gives a price-to-earnings growth (PEG) ratio of over three, which suggests a share price fall could be on the cards.
Of course, Dairy Crest has income appeal at the present time. It currently yields 3.8% from a dividend which is covered 1.7 times by profit. With inflation moving higher, this could create additional demand for the company’s shares and help to support its stock price. However, with a number of stocks in the FTSE 350 having 4%+ yields and offering lower valuations as well as similar growth outlooks, the relative appeal of Dairy Crest may be somewhat limited. As such, it may be better to avoid it until a higher valuation can be more easily justified.
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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.