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Stock Strategist

The Market's Most Overvalued Stocks

Consider selling these pricey shares.

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Sometimes choosing the right time to sell a stock is just as hard as--if not harder than--picking the right time to purchase it in the first place. There are certain valuation concepts such as price/book value, cash per share, and others that provide a reasonable floor at which an investor can comfortably say "it would be completely absurd for this stock to trade below this price." And if the stock does trend below that supposed floor, all else equal, the investor greedily accumulates shares in anticipation of even greater upside.

On the other hand, arguing the bear case of a high-flying stock can be perilous. As Alan Greenspan said just over a decade ago, "how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions ... ?" The fact is that we can't predict a widespread downturn with a high degree of confidence or accuracy: The market has shown an ability to surpass what seems to be the loftiest of valuations over and over again. However, through Morningstar's bottom-up approach to stock analysis, we have a better chance at singling out specific companies that have far surpassed rational expectations. Although the timing is admittedly difficult, investors are usually better served by selling at a good premium to a stock's fair value rather than stubbornly waiting for a greater fool to pay an even higher price for their shares.

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Joel Bloomer does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.