10 High-Risk Stocks to Avoid

Investors face many different types of financial risk. There’s the most basic risk—the risk of losing money. And then there’s the risk of missing your goals or, for retirees, the risk of outliving your assets. Investors who invest conservatively run the risk of not keeping up with inflation, while bond investors face interest rate and, if investing in lower-quality bonds, default risk. Investing internationally can involve currency and country risk. And particular sectors face their own sets of risks, too.

Today we’re looking at individual stocks that carry significant price risk, which means they’re trading well above Morningstar’s fair value estimate of their worth. Specifically, we screened for stocks that earn a Morningstar Rating for stocks of just 1 star. We think these are high risk stocks today.

High-Risk Stocks to Avoid Today

These stocks all earn 1-star Morningstar Ratings and carry the highest price/fair value ratios among the stocks Morningstar covers as of Feb. 24, 2023.

1) Mettler-Toledo International MTD

2) Old Dominion Freight Line ODFL

3) Dick’s Sporting Goods DKS

4) Cintas CTAS

5) Church & Dwight CHD

6) Idexx Laboratories IDXX

7) Progressive PGR

8) Watsco WSO

9) Hershey HSY

10) W.W. Grainger GWW

Most of the names on this list are good companies. To wit: Seven of the companies on the list maintain solid competitive advantages (or what we’d call economic moats). Five of the companies are run by top managers who have a history of adeptly allocating capital and who thereby receive the highest Morningstar Capital Allocation Rating. And perhaps most notable, two of the companies whose stocks are on our high-risk list are also among Morningstar’s Best Companies to Own, a list that features businesses scoring well on several quality-related Morningstar metrics.

What’s the investment lesson? A great company isn’t always a great stock to buy today; in fact, it can be a downright lousy stock to buy if it’s overvalued and doesn’t provide the buyer with a sufficient margin of safety.

Here’s a little bit about each stock on our high-risk stocks list. All data is as of Feb. 24, 2023.

Mettler-Toledo International

• Price/Fair Value: 1.72
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Diagnostics & Research

Mettler-Toledo International stock is the highest risk stock on our list, trading 72% above our $830 fair value estimate. The company is the global market leader in laboratory and industrial scales and has carved out a narrow economic moat thanks to its market leadership, quality products, and low rates of customer churn, notes Morningstar senior analyst Julie Utterback. The company carries a sound balance sheet and generates strong cash flow, and management has made smart investment decisions that have improved efficiencies. While there’s a lot to like about the company, its shares are extremely overvalued.

Old Dominion Freight Line

• Price/Fair Value: 1.56
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: None
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Trucking

The second company on our list with exemplary marks for how its managers allocate capital, Old Dominion is the fourth largest U.S. less-than-truckload carrier by revenue. The company doesn’t earn an economic moat rating because of the cyclicality of the U.S. trucking industry. But Morningstar senior analyst Matthew Young adds that Old Dominion is “the clear industry leader in terms of execution, freight selection, and service quality.” The company’s balance sheet is healthy, its free cash generation has been excellent during the past decade, and we don’t expect a new CEO in mid-2023 to change that. But Old Dominion stock is way overvalued, trading 56% above our $217 fair value estimate.

Dick’s Sporting Goods

• Price/Fair Value: 1.56
• Fair Value Uncertainty: High
• Morningstar Economic Moat Rating: None
• Morningstar Capital Allocation Rating: Standard
• Industry: Specialty Retail

Dick’s Sporting Goods lacks an edge, says Morningstar senior analyst David Swartz. Competition is stiff, as sporting goods are sold through many channels, and given the lack of growth in sporting goods retail prior to the pandemic, we believe a slowdown in sales at Dick’s is likely. As such, we don’t think the company has carved out an economic moat, and we think that any competitive advantages the firm has are eroding. We also have a high degree of uncertainty around our fair value estimate on the stock, in part because Dick’s is dependent on a few key vendors who may strike up relationships elsewhere (like Under Armour with Kohl’s) and is vulnerable to direct-to-consumer sales by suppliers. We think Dick’s stock is 56% overvalued today.

Cintas

• Price/Fair Value: 1.45
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Standard
• Industry: Specialty Business Services

Cintas is the first company whose stock lands on our high-risk stocks list that appears on Morningstar’s Best Companies to Own. “Best companies” are those with significant competitive advantages that are stable or improving, that are run by managers who’ve done a good or exemplary job of allocating capital, and that have reliable cash flows. Cintas is the dominant provider in the U.S. uniform rental and sales industry, yet we expect the company to continue to grow over the next decade, says Morningstar senior analyst Josh Aguilar. The firm has developed new product lines to cross-sell existing customers and invests in technologies to increase efficiency and customer stickiness, he adds. Although we like the business, we think Cintas stock is significantly overvalued, trading 45% above our $299 fair value estimate.

Church & Dwight

• Price/Fair Value: 1.44
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: None
• Morningstar Capital Allocation Rating: Standard
• Industry: Household & Personal Products

Brands beneath the Church & Dwight umbrella include the behemoth Arm & Hammer (which offers products in the laundry products, oral care, deodorant, and nasal care categories, among others) as well as Xtra, First Response, Orajel, and WaterPik, among others. We think the company lacks the scale, resources, and negotiating prowess of larger household and personal care competitors and therefore assign the company a no-moat rating, explains sector director Erin Lash. Plus, the company faces what she calls “unrelenting macro and competitive pressures” along with cost headwinds. Church & Dwight stock is 44% overvalued relative to our $58 fair value estimate.

Idexx Laboratories

• Price/Fair Value: 1.44
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Diagnostics & Research

Idexx Laboratories is the only stock on the list with a narrow economic moat and a positive moat trends, suggesting that the company’s competitive advantages are increasing. The company primarily manufactures diagnostic products, equipment, and services for pets and livestock and is poised to benefit from two key trends, says Morningstar senior analyst Debbie Wang: the continued increase in pet ownership and owners’ willingness to spend more on their animals. Management has made a number of smart acquisitions and maintains a solid balance sheet, though we take issue with its practice of repurchasing shares even as the stock is overvalued. And overvalued, it is: Idexx Laboratories stock trades 44% above our $326 fair value estimate.

Progressive

• Price/Fair Value: 1.43
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Insurance—Property & Casualty

Progressive underwrites private and commercial auto insurance and specialty lines and has carved out a narrow economic moat, despite fierce competition. In fact, Morningstar senior analyst Brett Horn calls Progressive “one of the strongest franchises in the insurance industry.” Here, too, management earns high marks for its capital allocation skills, which include sound balance sheet management and allocating capital to its high-return businesses. The typically nonacquisitive firm recently purchased ARX Holdings, which has allowed for bundling of home and auto insurance. Nevertheless, Progressive stock is expensive, trading well above our $99 fair value.

Watsco

• Price/Fair Value: 1.42
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Industrial Distribution

Watsco is the largest heating, ventilation, air-conditioning, and refrigeration products distributor in North America. The company has carved out a narrow economic moat thanks to its exclusive distribution rights and economies of scale, explains Morningstar director Brian Bernard. Management has completed more than 60 acquisitions since entering the HVACR distribution market in 1989 as well as three joint ventures—one of which grants Watsco exclusive distribution rights for Carrier products across some regions of the United States. Management maintains a solid balance sheet and has regularly increased its annual dividend. We nevertheless think Watsco stock looks expensive as it trades 42% above what we think it is worth.

Hershey

• Price/Fair Value: 1.41
• Fair Value Uncertainty: Low
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Standard
• Industry: Confectioners

Hershey is the second company featured on our high-risk stocks list that’s also included on our Best Companies to Own list. Hershey controls nearly half of the domestic chocolate space; its brands include its namesake plus Reese’s, Kit Kat, and Ice Breakers, among others. Given its dominant market share, leading brands, and sufficient resources, we think the company has carved out a wide economic moat, explains Lash. Notably, we view Hershey as a critical partner for retailers reluctant to risk out-of-stocks with unproven suppliers. Cash flows are generally reliable, too, which contributes to our low fair value uncertainty rating. Like Hershey Bliss chocolate, Hershey stock is rich, with shares trading 41% above our $169 fair value estimate.

W.W. Grainger

• Price/Fair Value: 1.41
• Fair Value Uncertainty: Medium
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Industry: Industrial Distribution

The industrial distributor operates in the fragmented maintenance, repair, and operating product distribution market, yet we think W.W. Grainger has managed to carve out a narrow economic moat, argues Morningstar analyst Dawit Woldemariam. Most of Grainger’s business focuses on large enterprises with complex procurement systems that appreciate the company’s ability to adeptly manage their accounts and provide inventory management services, which neither smaller industrial distributors nor online players can match. In fact, the company has continued to outgrow the U.S. maintenance, repair, and operations market. That being said, W.W. Grainger stock looks 41% overvalued today.

How Does the Morningstar Rating for Stocks Work?

The Morningstar Rating for stocks indicates whether a stock is undervalued or overvalued based on a stock’s current market price relative to our fair value estimate, adjusted for what we call uncertainty.

We calculate our fair value estimate for a stock based on how much cash we think a company will generate in the future. Of course, some companies have stable, predictable cash flows; others, meanwhile, have cash flows that are less reliable. Because of that, Morningstar’s analysts are more confident in the fair value estimates of some companies than of others. To account for their level of certainty behind a given fair value estimate, we assign uncertainty ratings to stocks, too.

Think of the uncertainty rating as a way to ensure that you’re getting a suitable margin of safety for investing in a stock. You’d expect a smaller margin of safety for a stock with very low uncertainty around its fair value, while you’d want a larger margin of safety before buying a stock with less certain cash flow expectations.

We therefore adjust our fair value estimates to account for uncertainty, and represent the result in our Morningstar Rating for stocks. Stocks that earn 1 or 2 stars are considered overvalued; stocks that earn 3 stars are fairly valued; and stocks that earn 4 or 5 stars are undervalued.

For more about how Morningstar’s investing philosophy, read Morningstar’s Guide to Stock Investing.

Remove the guesswork and make informed decisions faster. Morningstar Investor’s stock ratings, analysis, and insights are all backed by our transparent, meticulous methodology. Learn more and start a seven-day free trial today.