In this article, we discuss Morgan Stanley analyst Mike Wilson’s latest prediction and 10 overvalued stocks to watch. If you want to see more stocks in this selection, check out 5 Overvalued Stocks to Watch.
Mike Wilson, Morgan Stanley’s chief US equity strategist and CIO, joined CNBC on September 19, where he discussed his thoughts on the stock market and the overvalued benchmark indices, which according to him will cause “more pain” ahead. He noted that the average stock “has taken a lot of pain”, contending that this is how bear markets roll. While he believes that the average stock might have met its low near June, the market indices remain overvalued and “that is where the majority of the pain will come”. He said that the bond market has priced in most of the Federal Reserve’s anticipated initiatives. However, the stock market has yet to factor in the hawkish moves of the Fed.
The price-to-earnings multiple for the S&P 500 is “probably 2-times too high”. Wilson, however, observed that it is up to the investors to seek out securities that will weather the market storm, regardless of a recession or not. Morgan Stanley favors defensively positioned stocks, preferring earrings stability and realistic firms that have already “lowered the bar on earnings”. Morgan Stanley is “fifty-fifty” about a recessionary outcome, said Wilson, and earnings need to come down by 20% for the investment firm to declare that the US has entered recession. He noted that it might not be a long recession, and 2023 “could be a pretty good year”. However, the fourth quarter of 2022 “will be pretty tough”.
Mike Wilson maintained his stance that the US won’t face a “deep recession” and the equity market could rebound in 2023. Nevertheless, he does not think it is the right time to buy more stocks, citing an overvalued equity market. Some of the overvalued stocks to watch right now include McCormick & Company, Incorporated (NYSE:MKC), The Sherwin-Williams Company (NYSE:SHW), and Oracle Corporation (NYSE:ORCL).
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Our Methodology
We selected overvalued stocks based on price-to-earnings ratios, choosing firms with a P/E multiple of more than 30 as of September 19.
Most of these stocks recently received bearish ratings from Wall Street analysts on the back of reasons like upcoming headwinds, supply-chain problems, inflation and guidance cuts.
Morgan Stanley Analyst’s Latest Prediction and Overvalued Stocks to Watch
10. Healthcare Services Group, Inc. (NASDAQ:HCSG)
Number of Hedge Fund Holders: 15
P/E Ratio as of September 19: 35.14
Healthcare Services Group, Inc. (NASDAQ:HCSG) is a Pennsylvania-based company that provides administrative and operating services to the housekeeping, facility maintenance, and dietary service departments of nursing homes, retirement complexes, and medical centers in the United States. With a P/E ratio of 35.14 as of September 19, Healthcare Services Group, Inc. (NASDAQ:HCSG) is one of the overvalued stocks to monitor closely.
On July 21, Baird analyst Andrew Wittmann lowered the price target on Healthcare Services Group, Inc. (NASDAQ:HCSG) to $15 from $23 and maintained a Neutral rating on the shares. The analyst said he is decidedly more pessimistic as he slashed estimates due to customer attrition. He said becoming more positive needs higher confidence in cash generation potential and achievement. However, paired with softer fixed-cost coverage and slow gross margin trends, he cut his target.
According to Insider Monkey’s data, Healthcare Services Group, Inc. (NASDAQ:HCSG) was part of 15 hedge fund portfolios at the end of Q2 2022, compared to 17 funds in the prior quarter. Chuck Royce’s Royce & Associates is the leading position holder in the company, with more than 2 million shares worth $36.2 million.
Like McCormick & Company, Incorporated (NYSE:MKC), The Sherwin-Williams Company (NYSE:SHW), and Oracle Corporation (NYSE:ORCL), Healthcare Services Group, Inc. (NASDAQ:HCSG) is one of the overvalued stocks in the stock market.
Here is what Harding Loevner Global Small Companies Equity Fund has to say about Healthcare Services Group, Inc. (NASDAQ:HCSG) in its Q4 2021 investor letter:
“For the year, the portfolio’s US stocks failed to keep up with the robust returns of the region in the face of a pronounced style headwind, as US small cap growth stocks trailed their value peers by over 1,400 basis points. Disappointing business results from several US companies also worked against us. Healthcare Services, a provider of outsourced housekeeping and dietary services for post-acute-care and long-term assisted living facilities, saw its rising labor and food costs weigh on both revenues and profits as some of its customers balked at higher fees.”
9. MarketAxess Holdings Inc. (NASDAQ:MKTX)
Number of Hedge Fund Holders: 41
P/E Ratio as of September 19: 37.36
MarketAxess Holdings Inc. (NASDAQ:MKTX) is a New York-based company operating an electronic trading platform for institutional investors and brokers worldwide. The stock, with a price-to-earnings multiple of 37.36, is a notable overvalued player to watch.
On September 7, Credit Suisse analyst Gautam Sawant lowered the price target on MarketAxess Holdings Inc. (NASDAQ:MKTX) to $288 from $305 and maintained a Neutral rating on the shares. The analyst noted that MarketAxess Holdings Inc. (NASDAQ:MKTX) posted August total credit volume of $10.2 billion, down 4% month-over-month, but 27% higher on a year-over-year basis, given that credit market normalization is boosting trading activity. The company’s leadership position in credit markets is subject to the impact of monetary policy on credit conditions, the analyst added.
Among the hedge funds tracked by Insider Monkey, MarketAxess Holdings Inc. (NASDAQ:MKTX) was part of 41 public stock portfolios at the end of Q2 2022, compared to 39 funds in the last quarter. GuardCap Asset Management held the biggest position in the company, comprising roughly 2 million shares worth over $502 million.
Here is what Weitz Investment Management Partners Value Fund has to say about MarketAxess Holdings Inc. (NASDAQ:MKTX) in its Q1 2022 investor letter:
“MarketAxess Holdings (NASDAQ:MKTX) was among the Fund’s largest fiscal-year detractors. While our value estimate for MarketAxess declined considerably, our thesis and the company’s critical role in electronic bond trading for the next decade remain intact.”
8. Aon plc (NYSE:AON)
Number of Hedge Fund Holders: 49
P/E Ratio as of September 19: 40.00
Aon plc (NYSE:AON) is headquartered in Dublin, Ireland, operating as a professional services firm, providing solutions regarding risk, retirement, and health worldwide. As of September 19, Aon plc (NYSE:AON)’s price-to-earnings ratio came in at 40, which classifies it as an overvalued stock. The company’s Q2 revenue of $2.98 billion missed market consensus by $30 million, and for the first half of 2022, cash flows from operations decreased 16% to $1,131 million, and free cash flow plummeted 17% to $1,063 million.
On September 18, BofA analyst Joshua Shanker reinstated coverage of Aon plc (NYSE:AON) with a Neutral rating and a $294 price target. The analyst remains “broadly bearish” on insurance brokers, noting “rich” valuations and artificially boosted earnings due to suppression of discretionary expenses.
According to Insider Monkey’s data, 49 hedge funds were bullish on Aon plc (NYSE:AON) at the end of June 2022, compared to 44 funds in the prior quarter.
In addition to McCormick & Company, Incorporated (NYSE:MKC), The Sherwin-Williams Company (NYSE:SHW), and Oracle Corporation (NYSE:ORCL), elite hedge funds were piling into Aon plc (NYSE:AON).
Here is what Polen International Growth Fund has to say about Aon plc (NYSE:AON) in its Q1 2022 investor letter:
“A world-leading insurance brokerage Aon has continued to execute well and has exhibited attractive growth through the pandemic. The Ireland-based company tends to benefit from inflation through a data-centric approach to selling and distributing insurance solutions on a recurring basis. By scouring policy data flows across its business, Aon offers insights that intelligently match buyers and sellers of protection. As an asset- light and cash-generative business Aon has the ability to return capital to shareholders regularly. In the fourth quarter alone, it repurchased more than 4% of shares outstanding. Over the last decade, the company has repurchased a third of all shares outstanding.”
7. The Sherwin-Williams Company (NYSE:SHW)
Number of Hedge Fund Holders: 52
P/E Ratio as of September 19: 33.55
The Sherwin-Williams Company (NYSE:SHW) was founded in 1866 and is headquartered in Cleveland, Ohio. The company manufactures and sells paints, coatings, and related products to industrial, commercial, and retail customers. After falling short of Wall Street estimates for Q2 adjusted earnings and revenues, the company also slashed full-year earnings guidance. For Q3 2022, The Sherwin-Williams Company (NYSE:SHW) expects revenues increasing by low to mid-teens percentage, compared to the earlier guidance for an 11% year-over-year increase, or the $5.72 billion revenue consensus.
On July 28, Wells Fargo analyst Michael Sison lowered the price target on The Sherwin-Williams Company (NYSE:SHW) to $250 from $270 and reiterated an Equal Weight rating on the shares despite notably trimming his 2022 outlook, as the bulk of the cut is not related to the company’s paints store/architectural paint franchise, its core growth segment. The analyst also does not see a favorable catalyst to support multiple expansion after two consecutive years of earnings disappointments. In the short-term, he warned about increasing headwinds in Europe and China, which could continue into 2023.
According to Insider Monkey’s data, 52 hedge funds were bullish on The Sherwin-Williams Company (NYSE:SHW) at the end of June 2022, compared to 54 funds in the preceding quarter. Richard Chilton’s Chilton Investment Company is the biggest stakeholder of the company, with 1.26 million shares valued at $282 million.
Here is what ClearBridge Large Cap Growth ESG Strategy has to say about The Sherwin-Williams Company (NYSE:SHW) in its Q2 2022 investor letter:
“Rounding out our risk-focused stance, we believe the addition of Sherwin-Williams (NYSE:SHW), a manufacturer of paints and coatings for professional, industrial and retail customers, adds further resilience in the current inflationary environment. Paint is a relatively small part of total project input costs which can be passed through with price during inflation, and the company has a track record of successfully managing through periods of increased commodity costs. We are attracted to the company’s durability of growth by operating a strong franchise with both organic growth and consolidation amassing a strong portfolio of brands. We like Sherwin-Williams over competitors in the paint industry due to higher volumes, a domestically focused revenue base and strong relationships with the home builder and pro community. We believe the company will be able to keep pricing and expand margins as commodity pressures ease.”
6. Oracle Corporation (NYSE:ORCL)
Number of Hedge Fund Holders: 69
P/E Ratio as of September 19: 32.81
Oracle Corporation (NYSE:ORCL) is a Texas-based company that provides enterprise information technology products and services. The company posted mixed results, impacted by a strong US dollar. Oracle Corporation (NYSE:ORCL) noted that both net and adjusted earnings per share would have been 8 cents higher, had there not been currency headwinds. With a P/E ratio of 32.81, Oracle Corporation (NYSE:ORCL) is one of the most prominent overvalued stocks to watch.
On September 14, Berenberg analyst Nay Soe Naing initiated coverage of Oracle Corporation (NYSE:ORCL) with a Hold rating and a $72 price target. For investors interested in buying into the cloud adoption trend, SAP SE (NYSE:SAP) “presents itself more favorably,” the analyst told investors in a research thesis. The analyst contended that Oracle Corporation (NYSE:ORCL)’s mid-term opportunities and risks “are balanced” and does not expect a significant re-rating in the shares from its present level over the medium-term.
Among the hedge funds tracked by Insider Monkey, 69 funds reported owning stakes worth $4.18 billion in Oracle Corporation (NYSE:ORCL) at the end of the second quarter of 2022, compared to 61 funds in the prior quarter worth $4.3 billion. Jean-Marie Eveillard’s First Eagle Investment Management is the leading stakeholder of the company, with roughly 26 million shares valued at $1.8 billion.
Here is what First Eagle Investments Global Fund has to say about Oracle Corporation (NASDAQ:ORCL) in its Q2 2022 investor letter:
“Oracle is one of the world’s largest independent enterprise software companies and has been reinventing itself for the cloud-computing environment, a transition pursued primarily through investments in organic research and design and smallish, well-priced acquisitions. That said, Oracle in June closed its largest-ever deal with the acquisition of Cerner, a designer of software to store and analyze medical records and other healthcare data.
Oracle took on additional debt to finance this all-cash acquisition and as a result plans to moderate its stock-buyback program to focus on debt reduction. Despite the weak quarter for the stock, Oracle’s operations remain strong; it reported better- than-expected results for its most recent quarter and issued upbeat guidance for the coming fiscal year.”
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Disclosure: None. “More Pain”: Morgan Stanley Analyst’s Latest Prediction and 10 Overvalued Stocks to Watch is originally published on Insider Monkey.