Nobody likes paying over the odds, especially when buying company stocks. The following three areof the most overvalued shares on the FTSE 100, at least according to their current price/earnings ratio. But is there a better story behind that headline figure?
Tesco
Heres a surprise recovering grocery giant Tesco (LSE: TSCO) is currently trading at a whopping 63.4 times earnings. This follows four years of tumblingrevenues and negative earnings per share (EPS) growth. EPS crashedfrom 40.31p in February 2012 to just 3.42p at the start of this year. Over the same period, Tescos P/E ratio has soaredfrom from a cheap-looking 7.9 times to todays crazy number.
Clearly all is not lost, withTescos share price up 40% over the past 12months. Its futureis now a lot brighter as management worksto slash overheadsand temptback lost shoppers. Its valuationis forecastto fall to 28.1 times earnings next year, and 21.6 times in 2018. That starts to look a bit more sensible if not exactly cheap, given the challenges it still faces in a tough grocery market. With rising inflation set to squeeze shoppers pockets and Tescos margins, boss Dave Lewiscould struggle to make further headway. Rampantly overvalued? No longer. But still a little pricey for my liking.
Vodafone
Mobile phone giant Vodafone (LSE: VOD) hardly looks a great call at todays valuation of 39.4 times earnings. The share price is trading 14% lower than three years ago. Three out of the last four years seeingnegative pre-tax profit is the obvious culprit as growth slows andVodafone bears the 20bn burdenof its Project Spring revamp. However, thats now mostly complete and the rewards are set to blossom.
Vodafones earnings are now on an upwards trajectory, with a record rise of 18% this year and a further 23% forecast in 2016. Better still, while Tesco pays no dividend right now, Vodafone yields 6.5%. Todays toppy valuation also looks set to retreat, if slowly, to 31.68 next year, to 25.8 in 2017 and to 20.52 in 2018. At todays low price of197p, thiscould make a nice long-term recovery play for income seekers.
Randgold Resources
All that glisters is not gold, especially when it comes with a dazzlingly high valuation. Gold minerRandgold Resources (LSE: RRS) currently trades at 36.7 times earnings, which takes some of the shine off this play on gold. The share price is up 45% in the last year, although at todays price of 5,990p, its wellbelow its 52-week high of 9,820p.
The share priceappears to have peaked for now, falling 22% in the last three months. Randgoldsforecast valuation looks more tempting at 19.61 times earnings. But I would say this is a dangerous time to play the gold price, as investors bullishlyanticipatea Santa rally and Trump reflationary madness in 2017. Gold is said to be a good hedge against inflation butI reckon stock markets, and dividend stocks in particular, will be the place to be next year.For me, Vodafones dividend makes it the winner of these three stocks.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.