Newly Reminted Overvalued Stocks

Second chances are rare in the world of investing. Even the greatest investors (assuming a sliver of humility remains) will admit to numerous opportunities that stared them in the face but passed them by. Then, as expected, the stock rose or fell sharply (depending on whether it was to be a long or short bet), causing severe pangs for the informed, yet too hesitant, investor.

The stocks described below offer the ever-elusive second chance. A couple of months ago, these stocks traded at 25% or greater premiums to their fair values, putting them solidly in 1-star (overvalued) territory. Although these stocks were overvalued, prudent investors should have exited their positions, in our opinion. Realizing their fortuitous gains, they could reallocate the capital to undervalued names or simply build a cash position to be ready for better risk/reward opportunities. However, some investors undoubtedly missed the boat, as these stocks fell sharply along with the overall market, moving them from 1-star to 3-star (fairly valued) territory. Fortunately for those investors who missed their first chance, here's another: Each of these companies has rallied once again and is back in 1-star territory.  Western Digital Corporation's (WDC) fair value chart portrays this scenario.

Before describing these stocks, we'll impart a final observation. Successful investors grieve over missed opportunities just long enough to mentally document their errors. They then resume their search for the next under- or overvalued stock, lesson in hand. Meanwhile, those with thinner skin are paralyzed by their own brooding. Great investors know that the best way to recover both emotionally and financially is to learn from past mistakes and get back in the game.

Click here to find the most recent group of stocks that fit this mold. Note that we avoided companies with an economic moat and companies with star-rating fluctuations due to changes in our fair value estimates.

Alaska Air Group, Inc.  (ALK)
Industry: Air Transport
Price to Fair Value Estimate: 148%
From the  Analyst Report: The primary risk facing airlines is systemwide overcapacity, which applies downward pressure on yields. The carrier's finalization of a new labor agreement with its pilots union, the timing of which is uncertain, will probably result in higher unit labor costs, in our opinion. Further, increased competition in Alaska's route system could exacerbate margin deterioration during the impending downturn in air travel demand. Other threats include the risk of aviation accidents and terrorist activity.

Par Pharmaceutical Companies, Inc. 
Industry: Drugs
Price to Fair Value Estimate: 143%
From the  Analyst Report: Par remains several steps behind its specialty pharma peers. The company is rapidly losing relevance to large generic customers, as competitors like  Teva (TEVA),  Barr , and  Mylan (MYL) consolidate the industry. Branded pharma is bringing authorized generics in-house, reducing these opportunities for Par. Although this makes Par's transition to more complex and proprietary drug development necessary, the introduction of a branded salesforce by no means guarantees success; for every  King  or  Forest  that have flourished, many more have failed.

Western Digital Corporation (WDC)
Industry: Computer Equipment
Price to Fair Value Estimate: 137%
From the  Analyst Report: ... industry challenges prevent the company from building an economic moat. Competition among the drive manufacturers is fierce. Its two independent rivals,  Seagate and Excelstor, routinely slash unit prices in an effort to gain share and fill idle capacity. Western Digital's four other competitors are large integrated systems builders (Fujitsu, Samsung (SSNLF),  Hitachi (HIT), and Toshiba ). These captive manufacturers derive only a portion of their revenues from hard drives, and can cut disk drive prices to irrational levels, forgoing profits for sales. Additionally, Western Digital derives most of its revenues from powerful integrated information technology providers, such as  Dell ,  Hewlett-Packard (HPQ), and  IBM (IBM). These companies ruthlessly demand price concessions and can cancel orders at a moment's notice without penalty. Because disk drives are a commodity, Western Digital must succumb to these demands or risk losing the business to a competitor.

Fresh Del Monte Produce, Inc. (FDP)
Industry: Agriculture
Price to Fair Value Estimate: 128%
From the  Analyst Report: The company's banana business, which makes up one third of total revenue, has been especially challenging as of late. Bananas are the best-selling fruit in the world, but in 2003 to 2004, Fresh Del Monte was accused of price fixing the commodity with competitors Dole and Chiquita . The lawsuits have not been resolved, and Fresh Del Monte faces other challenges in Europe. In 2006, the European Union scrapped its quota system, which favored African and Caribbean producers over Latin American ones, for a tariff-only system. This created a massive influx of bananas from Latin America that wreaked havoc on pricing and led to operating losses for Fresh Del Monte in 2006.