Stock investors have been knocked for a loop in 2022: The Morningstar U.S. Market Index slid into in bear market territory this month. As of this writing, the index is down more than 22% for the year so far.
During down markets, investors often hear they should “buy the dip,” or invest in stocks that’ve fallen. In fact, even Warren Buffett has suggested the best time to invest in a stock is when “there’s blood in the streets.”
But a bloodied stock isn’t always an investment opportunity. After all, stocks can lose money—a lot of money—and still look overpriced based on whatever metric(s) an investor uses to determine a stock’s true worth.
Here are four stocks that’ve tanked this year that Morningstar thinks are overpriced. We’d argue that these are stocks to avoid now.
4 Stocks to Avoid in June
These stocks have lost more than the market this year, yet remained overvalued relative to Morningstar’s fair value estimates.
- Mettler-Toledo International (MTD)
- Lululemon Athletica (LULU)
- Shoals Technologies Group (SHLS)
- Old Dominion Fright Line (ODFL)
Here’s a little bit about each of these stocks, along with some key Morningstar data points for each. All data is as of June 14, 2022.
Mettler-Toledo International
- YTD Return %: -31.79
- Morningstar Price/Fair Value: 1.50
- Morningstar Uncertainty Rating: Medium
- Industry: Diagnostics & Research
Mettler-Toledo’s stock has fallen more than 31% this year. The global market leader in laboratory and industrial balances, Mettler-Toledo also holds a leading position in product inspection and an average share in other competitive markets. Given its competitive advantages, we’ve assigned Mettler a narrow Morningstar economic moat rating. Top-line results last quarter were surprisingly strong and the company enjoyed margin improvement, observes Morningstar analyst Aron Degagne. Nevertheless, we think the stock is about 50% overpriced compared with our US$770 fair value estimate.
Lululemon Athletica
- YTD Return %: -28.34
- Morningstar Price/Fair Value: 1.35
- Morningstar Uncertainty Rating: High
- Industry: Apparel Retail
Lululemon stock has had a tough go in 2022, down more than 28%. Yet we think the stock is overvalued, as it trades 35% above our fair value estimate of US$216. Granted, there’s a lot to like about this yoga and workout clothing maker. It’s a market leader in the athleisure fashion trend. It has competitive advantages and has carved out a narrow economic moat. And it has a solid plan to expand its product assortment and geographic reach, says Morningstar analyst David Swartz. That being said, we think costs could affect its margins and inflation could damp consumer spending on apparel, suggests Swartz.
Shoals Technologies Group
- YTD Return %: -29.51
- Morningstar Price/Fair Value: 1.27
- Morningstar Uncertainty Rating: Very High
- Industry: Solar
Shoals’ stock is off more than 29% this year. Shoals is a leader in the solar electrical balance-of-system market; its main customers are engineering, procurement, and construction firms building solar projects. Though the company has enjoyed robust margins, we’re not sure that will continue, says Morningstar analyst Brett Castelli; as such, we’ve assigned the company a no-moat rating. We think uncertainty here is very high, owing to the company’s concentrated customer base (its top three customers accounted for 40% of sales in 2021) and the cyclicality of the solar industry, he adds. We think shares are worth US$13.50 each; they’re trading 27% above that.
Old Dominion Freight Line
- YTD Return %: -33.01
- Morningstar Price/Fair Value: 1.23
- Morningstar Uncertainty Rating: Medium
- Industry: Trucking
Old Dominion stock is off more than 33% this year, yet the stock looks about 23% overvalued when compared with our US$195 fair value estimate. Old Dominion is the fourth-largest less-than-truckload carrier in the United States, and we consider it to be a high-quality transport idea with a healthy balance sheet run by adept managers, says Morningstar analyst Matthew Young. But cyclical downturns in freight demand are a risk, adds Young, and constrained driver availability across the trucking landscape is putting pressure on driver wages.
How to Spot Stocks to Avoid
When it comes to figuring out which stocks to avoid in a volatile market, Morningstar always suggests steering clear of overpriced stocks. In fact, we think that demanding a margin of safety—or buying stocks for less than they’re worth—is always important for long-term investors, given how unpredictable cash flows can be. But it’s even more important during times of economic instability. For more about our approach to evaluating stocks, read more about The Morningstar Rating for Stocks.
