How To Know When To Sell An Overvalued Stock | FAST Graphs

Hello everybody. This is Chuck Cardell, co-founder of Fast Graphs, the fundamentals analyzer software tool, aka Mr. Valuation. I do a lot of videos, of course, always talking about valuation and most of the time I show undervalued stocks that I think might look attractive and be worthy of conducting further research. But on the last video, which I did that, I had a couple of comments and one private message that inspired me to do today's video. Pardon me for reading, but let me read the first comment. May I suggest for a future video or episode how to determine when a stock is severely overvalued and when to take profits with examples of current stocks. Now that was kind of interesting. I hadn't thought of that before. And then the second comment was interesting to see in retrospect the undervalued stocks, but how about a video of currently overvalued stocks at a risk of a stealth bare market. And in the last video, the last comment I had talked about the fact that in the last video I did where I showed 22 stocks, almost all of them were down. So I'm going to relate to that comment also because it's not about stock price when I talk about valuation or predicting stock prices. It's about trusting fundamentals first and most importantly foremost. So let's get into today's video and look at some overvalued stocks. how to determine whether they're overvalued or not or how to recognize it at least and then when you could, you know, might want to consider taking profits or selling. And I do want to say this before I show it. There is no perfect example to this. Okay? Stocks can be irrationally overvalued and continue to get overvalued. And by the way, stocks can also become irrationally undervalued and because they're out of favor, continue to get undervalued because they do not ring a bell at the top or bottom of a market. But you can, if you understand intrinsic value, which is the question I posed in the last video, then you can make rational judgments, not perfect ones, but rational judgments that will serve you well in the long run. So, let's go ahead and get into the video. What I did was I created a fast graph. I've got 22 stocks here. I'm going to go over some of them or all of them actually, but I'm going to kind of spend some time on the first couple of examples so you understand what it is that I'm illustrating, but then I'm going to simply just go through these so that you can reinforce or so I can reinforce the principles. So, I'm going to do them in alphabetical order as usual. So, let's start with applied materials. Now this is a very popular semiconductor stock and just to illustrate things this is the operating results of the company and you can see they've had very strong growth but they have had some cyclicality had some dropping earnings during the recession dropping earnings during COVID but generally the price went up and the orange line on this graph actually represents the intrinsic value of the company. The gold line is the dividends and the area below the gold lines represents what portion of these profits or earnings are being paid out in dividends. Now, when I put stock price on the graph, you can see that price was correlated very closely with earnings up until we got into March of 2026. Now, if you had owned the stock back here, you should have been alerted the stock was getting overvalued, but you might not have sold. And if you didn't sell over the next year or so if you held it through this period of time, you'd have lost about 30% of your money on paper unrealized. But if you held on, you can see the price went up. It got overvalued again. And then from here, the price corrected once again down to fair value. And it did it here in a relatively short time from June of 2024 to March of 2025. But then we've had starting in March of 25 here, we've had this strong advance or assault of view of the stock price, but you also had some basically really good earnings years which kind of stimulated this I'll call it overly optimistic view of the business in terms of its value. Now you can see that once it reached the peak and no there's no way to know when that peak would occur as this was happening but once it reached the peak valuation here we now seen this correction that's been about 25% since June of this year. So the stock looks appears to be moving back to fair value. So how would you know when to sell? I would have argued you could have sold anywhere in this advance especially when you get up into these upper trenches. Now, one of the things that I often preach is that I want to see I want to flag a stock for sale once the earnings get more than two years ahead of forecast growth. Now, in the case of applied materials, it really has never done that. You could argue here at a price of 626 that it would be out be less than a year out. So this is an interesting one because even though it looks greatly overvalued on this chart, as I shorten the time frame, you can see that the growth rate of the company has increased. It increased substantially as I go through these time frames. So the stock is was definitely overvalued here and that could have been recognizable had you been, you know, watching it or had you had the advantage of having the fast graph. So let's go through another one. Here's advanced micro devices. I'm going to extend this out to a long chart again. Again, once you saw overvaluation, you have a massive correction, but then it resulted in another overvaluation, another massive correction. So, smart sales could have been anywhere in here. Not perfect sales, but sales when you recognize that overvaluation exists. But now, we've got this really strong overvaluation, and the stock looks like it's beginning to correct again. But once again, you're dealing with a company here that's got accelerated growth. So when you finally go to forecasting, that's the key. You can learn from the past, but you can only invest in the future. You have to look at the future. Now, Advanced Micro Devices, if these analysts are correct, and if you look at the scorecard, they've had a really good, let's say, an above average scorecard. The analysts have missed estimates 36% of the time in a one-year and interestingly enough 36% in a two-year. But so how much you would rely on these would be you got about a 70s some percent chance of having these estimates be reasonably correct and I want you to also notice that you will see estimates increasing here. So analysts are getting more positive. So this could be a great time to buy this company. It has almost no debt and it's A-rated and it's a great company and and it really doesn't have any dividend yield. Okay. So this is purely a growth situation. All right, but my point being is that you can visually see these overvaluation periods if you have the advantage of the fast graph tool. Next stock on here would be American Express. And once again, we see a stock whose price correlates with earnings as they all do. There's always going to be volatility and there's no perfection here, but there is soundness, reasonleness. Now, this is overvaluation, but you don't wouldn't necessarily sell. I wouldn't anyway. But yet, even if I didn't, I could have lost 33% of my money if I panicked and sold out in say March of 2016. If I bought it in April of 2014, if I got impatient, but had I waited and held on to the stock, I would have had this growth and then I had COVID come and you had a drop in earnings, then I had this huge surge. But clearly, this stock looks like it's overvalued now. And again, if I go into the forecasting graph, it's not quite as overvalued because earnings are expected to grow at 14%. So to kind of answer the question, how do you know? You do it through reason and analysis. But here's a another good example that I think is really interesting. If you look at AutoZone, this is again another pure growth stock. You see how the price correlated with its PE ratio of 15.39. This is PE equals to the growth rate. This isn't a perfect 15 PE, but it's roughly a 15PE. And you can see that as the stock got up here now, it went it it rose for three or four years. This is the thing that really gets investors in my opinion. You can't know when it's going to stop. But all of a sudden, with earnings flattening a little bit, the stock is very vulnerable up here at almost a 30PE and that has already led to a correction of 32%. Now, if I look at forecasting on this one, I'm looking at about 14% growth. The stock would still be, by my definition, overvalued here, but it's not dangerously overvalued from the standpoint of losing money. You could still end up making a 5% rate of return based on 14% earnings growth, but you're obviously getting a lot less return here than the company's earnings would suggest you deserved. And by the way, you deserved, not the company. And here's another example, Caterpillar. Once again, we see the strong correlation of earnings. So anywhere up in here, it doesn't you don't you you're not going to hit the peak every time. But if you waited now and saw the peak, this could be a very good time to sell the stock because it's clearly overvalued here. And even the forecasting graph in this case would show a strong overvaluation with the potential to generate a loss even though the company's earnings were going to grow almost 20% a year. The problem is price is what you pay, value is what you get. So any of these cells, any selling in this area here would be what I would call a prudent sell, but not a perfect cell. Again, I want to emphasize here's another example. Sienna, and this was even more pronounced because we had this massive run up in price. We had this strong increase in earnings. So even if I draw this as a short-term graph, the price, even with this accelerated expectation of earnings, got significantly overpriced. But if I'm looking at it today as buying it today, it could actually be considered fairly valued because the future growth would justify today's valuation. The historical growth did not justify this high valuation here. I hope I'm making that clear. Let's look at Chipotle Mexican Grill. Once again, we see a stock that correlated relatively closely. You know, here the normal PE maybe becomes more relevant. The market liked to put a premium value, but even at that premium value, it's gotten well above what prudence would dictate it should. And here we got Cumins again. Cumins m very strong correlation between price and earnings. And then we have this little bit of growth in earnings and this surge in price. And then we see the stock correcting precipitously. So I'm just going to go through the rest of these rather quickly. I think you get the picture. But once again, you can see the acceleration of growth. So here's where you want to look at the forecasting graph. And this is a very risky picture, I might add, but if it's accurate, this would be a good investment at these levels. It could generate 40% annualized rates of return if you were buying it today. And as far as selling it, you would have wanted to sell it somewhere back here when it was really crazy overvalued if you were going to sell it. The next one is Costco. Very popular stock. And we can see that this is another blue line example. we see these special dividends being paid. But once it got really overvalued here, just notice if nothing else how the stock price tends to flatten but get very volatile once you get into peak periods of overvaluation. So you're not going to make perfect choices here. Here's Cisco Systems, the communications equipment company, once again got significantly overvalued. We're starting to see a crack in the armor. The next one would be General Dynamics. Now General Dynamics tracked earnings pretty well. There was a time you could have bought it really inexpensively when earnings were kind of weakening. This is when defense spending was being cut and then as defense spending accelerated the company's earnings growth accelerated with it and so we started to see the stock then moving into overvaluation periods. Would you sell it here? The question is it depends on your own tolerance for risk. Now in this case I'm looking at a stock here that's trading at $359. And if I got here more than two years, the fair value theoretically would only be $299. So this would indicate a sale for me or at least the sell watch if I was if I had owned the stock when it was more fairly valued. And we get a similar situation with Corning here, the electronic components company. We see this high correlation. Markets can get crazy. And once again, we're seeing a very strong correction potential. We look at Iron Mountain. Look what happened when it got overvalued. Not only did it correct, but it also got very volatile. So, you have to ask yourself, if you're an investor holding this stock, are you happy going through this kind of rise, then this kind of drop, then this kind of rise, and this kind of drop? Are you psychologically empowered to be able to walk through that kind of market? And I think most people are. Here's in it. Once again, we see massive overvaluation. So, these are stocks that are beginning to correct, but have not yet corrected. Lamb Research would be another one that's expected to see accelerated earnings growth, but you want to be buying it down here when the valuation is fair because once again, if you look at this stock here, you would be able to earn just under a 10% rate of return, but the company generated almost a 30% rate of return. You're not fully participating in the business growth if you pay these inflated prices for it. Here's monolithic power. Once again, we see the same thing. You get acceleration earnings growth, the market gets real hysterical, but then at some point the markets want to correct and you end up with a lot of volatility. Look how lower the volatility was when the stock was reasonably priced. Next one here would be the old Rathon RTX. This is a combination of Rathon and United Technologies. And here the stock is getting crazy overvalued relative to its historical norms and it's crazy overvalued relative to forecasting. So you give a chance of earnings to grow at over 10% and you could lose 14% annualized if and when the stock reverts to the mean. And again that period of time is not determinal. Here's striker medical equipment sales. And once again we see a stock that was trading feverishly. But notice even how volatile stocks get when they get overvalued like this. That gets very hard for a lot of investors to own. But we're seeing now a significant correction. Is it time to buy again? and you go to forecasting and I would say it's still premature. I would still be holding out for the price to be down here on the orange line before I personally would invest my money. The next example here is Texas Instruments and once again we see that same pattern, a lot of cyclicality here and we see a lot of volatility with valuation and then we see the stock overpriced and look like it's beginning to correct. Then here's Union Pacific. Once it got overvalued, you're holding it through periods where you'd have made almost no money, but then you had this rally again. But the question is, are you psychologically fit or strong enough to take this kind of volatility and be able to hold the stock comfortably? Bottom line is you're taking a lot of risk at these high valuations. You're taking a risk that even if the company does good, you won't. And here's Walmart was classically correlating with earnings all these years. got overvalued and even during this period of time if you look the company did outperform its earnings but that was a period of overvaluation then we've had this strong runup and now we've have this correction looking to happen so this would be a sale in my portfolio if I owned it now the point of all this is that earnings determine market price in the long run and you can't try to guess where stock prices are going to go because the third comment I was the last 22 stocks I showed my last video, all of them had been down. It doesn't make any difference. I'm not forecasting price. I'm illustrating valuation. It's up to every individual investor to do their own research and due diligence to determine if they are comfortable investing in the stock. And just because you buy a stock and it goes down doesn't mean you're wrong. Just because you buy a stock and it goes up doesn't mean you're right. Peter Lynch, he taught us that very important lesson. Focus on fundamentals. Trust fundamentals and make your judgments based on what the intrinsic value of a business and its operating history. Then coupled with its operating potential in the future with more it and then make your decision accordingly. Anyway, if you like this video, give me a like, ring the bell, subscribe to my channel, also take a look at the new book. I've got a bunch of you have pre-ordered the book. It's going to be called All Investing is Value Investing, and we'll have a link to it at the bottom of this video. And my goodness, if you're invested in stocks and don't subscribe to Fast Graphs, I think you're making a very, very big mistake. I hope you enjoyed this. Thanks for watching.