An
overvalued company is a business that is believed to have a higher market value than its actual worth or the value it generates.
Full definition
The parent of Snapchat, which just fell below its IPO price, is the «
most overvalued company in the world,» said NYU's Scott Galloway.
«U.S. stocks are probably among the
more overvalued companies on a global scale,» says Luc de la Durantaye, managing director of asset allocation and currency management at CIBC Asset Management.
In other words, «growth» companies are essentially defined
as overvalued companies that can be expected to underperform in the future, whereas «value» companies are essentially defined as undervalued companies that can be expected to outperform in the future.
Buy into a great company at an attractive valuation (Disney) and sell
an overvalued company with holes in its business model (Netflix).
If you buy stock in
an overvalued company, your returns are likely to be less than the sum of dividend yield and dividend growth.
According to Robert Arnott in this interview in Investment Advisor Magazine, the flaw with this type of index is that it becomes overweighted with
overvalued companies and underweighted with undervalued companies.
If traditional indexes give too much weight to large or
overvalued companies, equal - weight indexes are biased toward small - cap stocks, sometimes dramatically.
Using the PEG formula, it is assumed that a fairly valued company would have a PEG of 1, where an undervalued company would be less than 1, and
an overvalued company would be more than 1.
There's no question that cap - weighted indexes have a flaw: because they are heavily influenced by each stock's current share price, they give greater weight to
overvalued companies and less to undervalued ones.
A high PE Ratio may indicate
an overvalued company, and a low PE Ratio may indicate a company that is trading below fair value.
While we think analysts tend to
overvalue companies, and have optimistic views on their long - term growth prospects, we can still use this metric as a relative gauge.
And in that respect, they argue, cap - weighted indexes have a major flaw: they give the most weight to
overvalued companies and the least to undervalued companies.
But it offers an easy - to - use tool for identifying clearly under or
overvalued companies.
The DCF analysis appears to be
overvaluing the company.
In a declining market,
the overvalued company would likely decline by a greater degree than the undervalued company.
However, I am confident that fairly valued companies will fare better going into challenging economic environments than
overvalued companies will.
Unfortunately for Cycloramic, however, it seems that Shark Tank investors may have
overvalued the company's potential to move beyond what could end up being a one - hit wonder.