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(YURIKO NAKAO)
(YURIKO NAKAO)

TheStreet.com

10 overpriced U.S. stocks actually worth buying Add to ...

UBS's Jonathan Golub, the bank's chief U.S. market strategist, says investors should buy expensive S&P 500 stocks. No, that isn't a typo.

Mr. Golub reasons that investors aren't paying enough for a growth premium, so expensive large-cap stocks will outperform the pack if the equity market rallies. This seemingly illogical strategy might just work.

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Here are 10 of the most expensive S&P 500 stocks based on forward earnings multiples. They receive terrible ratings from analysts, with low proportions of "buy" ratings. But, they will probably be the first stocks upgraded if economic growth picks up.

10. Regions Financial Corp. is a commercial, retail and mortgage bank. Its second-quarter loss widened to $277-million, or 28 cents a share, as revenue dropped 16 per cent to $1.9-billion. The gross margin climbed from 4 per cent to 11 per cent. Regions has $7.4-billion of cash and $18-billion of debt. Its stock trades at a book value multiple of 0.5, a sales multiple of 1.2 and a cash flow multiple of 3 - 60 per cent, 35 per cent and 68 per cent discounts to industry averages. Of analysts following Regions, two advise purchasing its shares, 17 recommend holding and four suggest selling.

Bullish Scenario: Credit Suisse offers a price target of $10, implying an advance of 35 per cent.

9. SunTrust Banks Inc. provides consumer and corporate financial services. SunTrust swung to a second-quarter profit of $12-million from a year-earlier loss, but it remained unprofitable on a per-share basis. Revenue declined 8.8 per cent. The operating margin doubled to 26 per cent. SunTrust has $4.8-billion of cash and $22-billion of debt. Its stock is expensive based on forward earnings, but sells for a book value multiple of 0.6, a sales multiple of 1.4 and a cash flow multiple of 1.5 - 55 per cent, 20 per cent and 84 per cent discounts to peer averages. Only 26 per cent of analysts rank the stock "buy."

Bullish Scenario: Citigroup forecasts that SunTrust's stock will gain 30 per cent to $35.

8. Monster Worldwide Inc. operates a network of web sites connecting employers and job seekers. Monster's second-quarter loss doubled to $3-million, or 2 cents a share, as revenue declined 3.7 per cent to $215-million. The operating margin dropped from 2.1 per cent to 0.6 per cent. Monster has $297-million of cash and $50-million of debt. Its stock sells for a forward earnings multiple of 47. However, its book value multiple of 1.5 and sales multiple of 1.8 reflect discounts of 80 per cent and 79 per cent to Internet services industry averages. Just 38 per cent of analysts rate Monster's shares "buy."

Bullish Scenario: SunTrust Robinson Humphrey offers a target of $16, implying 80 per cent upside.

7. Boston Properties is a real estate investment trust with office properties in New York, Washington D.C. and Princeton, N.J. Its second-quarter profit decreased 9 per cent to $61-million, or 44 cents a share, as revenue ascended 3.2 per cent to $403-million. The operating margin extended from 40 per cent to 43 per cent. Boston Properties has $1.7-billion of cash and $7.3-billion of debt. Its stock is expensive based on all relative valuation metrics. Of analysts covering Boston Properties, nine advocate purchasing its shares and 15 recommend holding. None say to sell.

Bullish Scenario: FBR Capital Markets predicts that the stock will increase 15 per cent to $97.50.

6. Kimco Realty Corp. is a REIT that owns neighborhood and community shopping centers. It swung to a second-quarter profit of $25-million, or 3 cents a share, from a year-earlier loss. Revenue expanded 20 per cent to $241-million. The operating margin turned positive. Kimco has $135-million of cash and $4.3-billion of debt. Though expensive based on trailing and forward earnings, Kimco's stock trades at a book value multiple of 1.4, a 39 per cent discount to its REIT peer average. Seven analysts rate it "buy," 13 rate it "hold" and three rank it "sell."

Bullish Scenario: RBC values Kimco's stock at $18, suggesting a return of 7 per cent.

5. Salesforce.com sells customer and collaboration management software to businesses. Second-quarter profit decreased 30 per cent to $15-million, or 11 cents a share, as revenue jumped 25 per cent to $394-million. The operating margin contracted from 9.3 per cent to 7.5 per cent. Salesforce.com has $742-million of cash and $461-million of debt. Its stock is expensive based on all value metrics, commanding a forward earnings multiple of 66, a book value multiple of 10 and a cash flow multiple of 38. Still, 20 analysts recommend buying the shares and 15 recommend holding them.

Bullish Scenario: Deutsche Bank forecasts that Salesforce.com's stock sill rise 26 per cent to $130.

4. PulteGroup Inc. is a homebuilder in the U.S. Pulte swung to a second-quarter profit of $76-million, or 20 cents a share, from a year-earlier loss. Revenue surged 92 per cent to $1.3-billion. The operating margin remained in shallow negative territory. Pulte has $2.8-billion of cash and $4.4-billion of debt. Its stock carries an exorbitant forward earnings multiple of 58, but a book value multiple of 1, a sales multiple of 0.6 and a cash flow multiple of 3.1 - 52 per cent, 26 per cent and 57 per cent discounts to homebuilding averages. Just 16 per cent of researchers rank the stock a "buy."

Bullish Scenario: Barclays values Pulte's stock at $12, implying that it will gain 46 per cent.

3. AvalonBay Communities Inc. is a REIT that develops and owns multi-family communities. Its second-quarter profit more than doubled to $51-million, or 35 cents a share, as revenue stretched 3.8 per cent to $221-million. The operating margin rose from 23 per cent to 32 per cent. AvalonBay has $562-million of cash and $3.9-billion of debt. Its stock trades at a trailing earnings multiple of 137, a forward earnings multiple of 76, a book value multiple of 2.7 and a cash flow multiple of 25 - sizable premiums to REIT averages. Roughly 26 per cent of analysts advise purchasing the REIT.

Bullish Scenario: KBW predicts that AvalonBay's stock will advance 8 per cent to $117.

2. Equity Residential Prop. is another REIT that develops and owns multi-family properties. Its second-quarter net income tumbled 90 per cent to $10-million, but earnings per share fell 33 per cent to 2 cents. Revenue gained 5.2 per cent to $510-million. The operating margin dropped from 27 per cent to 24 per cent. Equity Residential's stock sells for a forward earnings multiple of 162, a book value multiple of 2.8, a sales multiple of 7 and a cash flow multiple of 21 - all premiums to industry averages. Of analysts following Equity, six rate its stock "buy," 17 rate it "hold" and four rank it "sell."

Bullish Scenario: Macquarie values Equity's stock at $53, suggesting 8 per cent of upside.

1. Vulcan Materials Co. sells construction aggregates, including sand and asphalt. Vulcan swung to a second-quarter loss of $24-million, or 18 cents a share, from a profit of $22-million, or 14 cents, a year earlier. Revenue inched up 2 per cent to $736-million. The operating margin fell from 9.2 per cent to 5.9 per cent. Vulcan's stock sells for a forward earnings multiple of 243. But, its book value multiple of 1.2 and cash flow multiple of 15 are on par with materials industry averages. Three analysts rate Vulcan's stock "buy", 13 rate it "hold" and two rank it "sell."

Bullish Scenario: UBS forecasts that Vulcan's stock will appreciate 42 per cent to $51.







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