An overvalued stock has a current price that is not justified by its earnings outlook typically assessed by its price-to-earnings (P/E) ratio.
Similarly, a company is considered overvalued if it trades at a price that is unjustifiably and significantly in excess of its peers.
Earnings analysis is the most common way to identify an overvalued stock.
The most popular valuation metric for publicly traded companies is the P/E ratio, which analyses a company's stock price relative to its earnings.
Stocks with a high P/E ratio are considered to be overvalued.
Overvalued stocks are sought by investors looking to short positions and capitalize on such anticipated price declines.
Investors must be careful in identifying overvalued stocks, as some stocks may legitimately trade at a premium due to their brand recognition, superior management, or other factors that increase the value of one company's earnings over another.
Check out Equitymaster's powerful stock screener which screens stocks based on fundamentals, valuations along with other themes. Here, you'll find a list of overvalued stocks along with the undervalued ones.
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