3 Overvalued Stocks to Avoid in September
These overpriced names could be vulnerable in a stock market downturn.
Susan Dziubinski: Hi, I’m Susan Dziubinski, co-host of The Morning Filter podcast. On a recent episode, Morningstar Chief US Market Strategist Dave Sekera said that September is historically the worst month for stocks. If we were to experience a stock market selloff, he’d expect overpriced tech stocks and consumer discretionary stocks to struggle most. His stocks to avoid were Sandisk SNDK, Ciena CIEN, and Brinker EAT.
Today, we’re sharing three more stocks to avoid this month. These overvalued tech and consumer stocks could be vulnerable in a stock market downturn.
3 Overvalued Stocks to Avoid in September
Our first overvalued stock to avoid this month is Seagate Technology. Last quarter, the company shattered its own records for gross margin and operating margin, and its guidance suggests the artificial intelligence-driven storage cycle is still accelerating. This maker of disk drives remains tricky to value given how closely its fortunes are tied to the AI cycle. If supply were to exceed demand, we’d expect Seagate to experience material pricing erosion. But for now, we think Seagate has a clear path to an earnings compound annual growth rate above 30% for years. Even so, the stock trades well above our $700 fair value estimate and looks overvalued.
Read Morningstar’s full report on Seagate Technology.
Our second overpriced stock to avoid is Cava Group. The fast-casual chain’s Mediterranean bowl concept has resonated with consumers, driving 41% average annual system sales growth over the past seven years. But in an industry with low switching costs and low barriers to entry, we don’t think Cava has carved out an economic moat. We do think that investors are overestimating Cava’s ability to rapidly expand its footprint and underestimating the costs required to maintain its value proposition. We assign Cava’s stock an $18 fair value estimate, and shares trade way, way above that.
Read Morningstar’s full report on Cava Group.
Our final pricey stock to avoid is another restaurant name, Darden Restaurants. The largest full-service dining operator globally, Darden’s portfolio includes the brands Olive Garden and Longhorn Steakhouse, as well as fine dining’s Capital Grill and Ruth’s Chris, among others. We think the company has carved out a narrow economic moat thanks to its cost advantage. And over the next decade, we forecast system sales to grow 5.1% on average. We think Darden stock is worth $156 per share, and it looks overpriced today.
Read Morningstar’s full report on Darden Restaurants.
For more stock ideas, be sure to tune in to The Morning Filter each week wherever you get your podcasts and visit Morningstar.com, too.
Morningstar director Eric Compton and analyst Ari Felhandler provided the research behind this segment.
Watch 3 Defensive Stocks to Buy in September for more from Susan Dziubinski.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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