Is That Stock Overpriced

Posted on 09. Jan, 2012 by Emily in General

For those of us who don’t work in finance professionally, determining that a stock is overpriced can be difficult. Given the opportunity, I personally would be reluctant to invest in any stock without the help of a professional. If you’re more confident than me, or are eager to learn some of the basics, perhaps one of the most important lessons to learn is how to determine if a stock is overpriced.

You want to make a good investment and blowing your money on an overpriced stock isn’t always a step in that direction. Let’s look at what some professional sources have written about overpriced stocks and how to spot them.

Is That Stock Overpriced

Investopedia says that stocks that are overpriced or “overvalued” as:

“A stock with a current price that is not justified by its earnings outlook or price/earnings (P/E) ratio and, therefore, is expected to drop in price. Overvaluation may result from an emotional buying spurt, which inflates the the stock’s market price, or from deterioration in a company’s financial strength.”

Candlestick Trading Forum offers advice as to how investors can look out for overpriced stock:

“One way to identify overpriced stocks is to recognize a high debt load as a warning sign. Likewise in a booming market many new investors will enter the market looking to make profits. As buying pressure increases so will stock prices. So long as there are new investors coming on board the buying pressure will continue and so will the rise in stock prices. To identify overpriced stocks in this market environment one needs to anticipate what will happen when the new investor comes on board and traders start short selling in anticipation of a stock market correction or full scale market reversal. “

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Is That Stock Overpriced

An article that I found to be really helpful is an Ezine article written by Jason Markum. He breaks down the definition of an overpriced stock really well and gives some great advice for how to spot one, as seen below:

“One of the very best ways to determine whether a stock is overpriced is to look at the price/sales ratio or PSR as it is sometimes referred to. The PSR is the price per share divided by the sales per share. If this number is greater than.75 then the stock is way too expensive.

Another really great indicator that the stock may be overvalued is insider selling. If management doesn’t want to own shares in the company stock, this is a very good sign to tell you to stay away. You can see what company insiders are doing as far as buying and selling stock by checking with the SEC and looking up the company at the SEC’s website.

High PSR stocks more often than not also have high price-to-book values. A book value is usually just the companies assets minus all their liabilities. If a company is selling at less than book value then chances are it’s undervalued and the stock price may increase over time. On the other hand if a stock is already selling at higher than book value then the potential for future growth may already be factored into the overpriced shares of the stock.”

Is That Stock Overpriced

Is That Stock Overpriced

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