11 Stocks to Sell

There are many skills in life that we struggle to master. Practicing effective time management, for instance. Learning to say no. Truly listening rather than thinking about what we plan to say next. Remaining positive. Knowing when to speak up--and, conversely, knowing when to shut up.

When it comes to investing, one of the toughest skills to learn is when to sell a stock. Successful money managers make it sound so simple: Sell a stock once it has reached your estimate of its intrinsic value. But that’s easier said than done. What if the stock still looks cheap relative to others in its industry? Or if its story hasn’t entirely played out yet? Or if you worked for the company or were gifted the stock and therefore have some sort of emotional attachment to it?

Certainly, there may be reasons--some logical, some less so--to hold on to a stock even after it has reached fair value. But when a stock’s valuation is truly stratospheric, it’s time to let go.

Today we're looking for stocks that are remarkably overpriced. Our screen focuses on stocks in our coverage universe that are trading at least 50% above our estimate of their fair values. We're limiting our search to stocks with low or medium Morningstar Uncertainty Ratings; because of their more-predictable cash flows, these stocks are easier to value, and, as a result, our analysts are quite confident in their fair value estimates of these names. (Read more about our uncertainty ratings here.)

Eleven stocks made the cut. Data is through June 3.

Ferrari

RACE

Fair Value: $78

Price: $141.97

Price/Fair Value: 1.82

Economic Moat: Wide

Uncertainty: Medium

This automaker has a Morningstar Economic Moat Rating of wide. It designs and manufactures some of the world’s most expensive sports cars. Given that the brand is synonymous with state-of-the-art technology and quality, Ferrari stock regularly trades at a luxury-goods-type valuation, says senior analyst Richard Hilgert. The company is compelling, with stability in its revenue, addressable market growth, expansive profit margins, and solid returns on invested capital throughout economic cycles.

“While we would not be averse to paying up for a wide-moat company like Ferrari, we view this stock as too overvalued relative to our forecast for the automaker's healthy cash flow generation and superior returns on invested capital,” he notes. The stock is trading a remarkable 82% above our fair value estimate.

Cintas

CTAS

Fair Value: $127

Price: $223.39

Price/Fair Value: 1.76

Economic Moat: Wide

Uncertainty: Medium

Cintas dominates the uniform and facilities services rental market; these operations enjoy significant scale-based cost advantages and earn the company a wide economic moat, says analyst Matthew Young. The firm has benefited from decent U.S. economic growth, and we expect it to continue to generate returns on invested capital of 14% on average in the years ahead.

“Overall, Cintas’ sales execution has proved robust over the past five years, and its operating profitability continues to impress,” adds Young. “This is no secret among investors, however, and the shares consistently trade at a healthy premium to our fair value estimate.” How healthy? Try 76% above our fair value estimate.

Fidelity National Information Services

FIS

Fair Value: $68

Price: $116.57

Price/Fair Value: 1.71

Economic Moat: Narrow

Uncertainty: Medium

This narrow-moat firm provides core and payment processing services to banks, as well as processing software for capital markets providers, asset managers, and custodians. The firm’s near- and medium-term outlook depends on its ability to effectively integrate its acquisition of SunGard and capitalize on any cross-selling opportunities, says analyst Colin Plunkett.

“The more we dig into the company's leveraged acquisition of SunGard, the more convinced we become that the deal and the aggressive cost-cutting resulted in temporary gains that will ultimately destroy value for shareholders,” he explains. Further, we have some integration-related concerns about First National’s $43 billion planned purchase of Worldpay. With shares trading 71% above our fair value estimate, we view the stock as significantly overvalued.

FactSet Research Systems

FDS

Fair Value: $163

Price: $276.89

Price/Fair Value: 1.70

Economic Moat: Wide

Uncertainty: Medium

FactSet provides financial data and portfolio analytics to the global investment community. It boasts a wide economic moat thanks to its proprietary data offerings, sticky portfolio analytics solutions, and the embedded nature of its product offerings, argues Plunkett. The company has generated returns on invested capital that top 30%. That being said, we expect FactSet to experience slower growth and lower returns.

“We believe the rise in passive investing will weigh on FactSet’s target market through customer fee compression, resulting in slower growth,” he explains. “Since investor funds have flowed away from active managers, which require more analysts, FactSet's opportunity to sell additional seat licenses has decreased.”

Plunkett calls the shares “materially overvalued by the market.”

Church & Dwight

CHD

Fair Value: $46.50

Price: $75.97

Price/Fair Value: 1.63

Economic Moat: None

Uncertainty: Medium

The world's leading producer of baking soda, Church & Dwight is perhaps best known for its Arm & Hammer brand. Its portfolio also includes Xtra, Orajel, OxiClean, and Water Pik, among others. However, we don’t reward the company an economic moat, because not all of its brands have amassed as much prowess as those name brands, says sector director Erin Lash. And that has impeded the firm’s efforts to entrench itself with retailers.

Extracting costs to fuel investments in research, development, and marketing has helped boost growth in the past, allowing the firm to chalk up solid market share, she explains. But the landscape for its products is highly competitive and includes peers that maintain significantly more resources and that are ultimately more entrenched in retailer supply chains.

Shares trade 63% above our fair value estimate. “We’d suggest investors refrain from building a position in this no-moat name,” concludes Lash.

Mettler-Toledo International

MTD

Fair Value: $450

Price: $728.75

Price/Fair Value: 1.62

Economic Moat: Narrow

Uncertainty: Medium

A supplier of weighing and precision instruments to customers in the life-sciences, industrial, and food retail industries, Mettler-Toledo holds leading positions in most of its product lines and therefore has carved out a narrow economic moat. Regional director Alex Morozov notes, however, that the firm’s business model is mature and is therefore likely to experience slow growth.

Despite the company’s limited growth potential, shares trade at a stunning 62% premium to our fair value estimate. Why is that?

“It is a notoriously efficient operator, and its execution has historically been so superb that investors have typically rewarded it with a substantially higher multiple than its faster-growing peers,” observes Morozov.

MSCI

MSCI

Fair Value: $135

Price: $216.26

Price/Fair Value: 1.60

Economic Moat: Wide

Uncertainty: Medium

The financial-services company known for its benchmark indexes and portfolio risk tools for institutional investors around the globe has carved out a wide economic moat. The firm has done an effective job of monetizing its valuable intellectual property, says Plunkett. Subscription retention rates topped 95% this quarter, he reports. And the shift toward passive investing should allow the firm to sustain growth and increase pricing.

“The company's recognized brand and high switching costs represent a steep challenge for rivals that is unlikely to be surmounted in the near to distant future,” notes Plunkett.

That being said, shares are extremely rich, trading 60% above our fair value estimate.

IDEXX Laboratories

IDXX

Fair Value: $156

Price: $245.59

Price/Fair Value: 1.57

Economic Moat: Narrow

Uncertainty: Medium

Idexx has dug a narrow economic moat in the veterinary diagnostic lab business thanks to its scale and reach. Moreover, it’s well-positioned to benefit from two trends, notes senior analyst Debbie Wang: the increase in total households owning pets and an increased willingness among pet owners to spend more on their animals. The company has been an innovator in its field, has been effective at cross-selling many products and services, and has built a strong sales organization.

Despite our positive outlook for the company and its growth potential, the shares trade 57% above what we think they’re worth.

“We continue to think there is a takeout premium inflating the stock, and find it difficult to justify where shares have been trading,” she concludes.

Gildan Activewear

GIL

Fair Value: $23

Price: $35.81

Price/Fair Value: 1.56

Economic Moat: None

Uncertainty: Medium

Gildan--maker of T-shirts, underwear, socks, and hosiery, as well as some branded clothing--hasn’t established significant competitive advantages and therefore does not earn an economic moat. The retail prices for its products can be as much as 30% lower than those of its competitors, which signals that the brands lack pricing power, observes analyst David Swartz. Not surprisingly, it reports lower growth margins than its competitors with superior brands, and it faces intense competition.

“A significant amount of its growth has come through acquisitions as organic growth in basic apparel is not much more than overall population growth,” notes Swartz. The firm has had some success in print wear basics, thanks to a cost-efficient production model, he adds.

We peg a $23 fair value estimate on the stock; shares trade 56% above that.

Waste Connections

WCN

Fair Value: $61

Price: $94.19

Price/Fair Value: 1.54

Economic Moat: Wide

Uncertainty: Medium

The third-largest integrated provider of traditional solid waste and recycling services in North America, Waste Connections earns a wide economic moat that has translated to impressive margins and solid free cash flow generation, says Young.

Moreover, we expect the company to continue to acquire smaller waste-collection operations, allowing it to apply its operational know-how and pricing discipline to generate additional profitability and gain entrance to new geographic regions, he adds. Yet the shares are trading 54% above our fair value estimate.

“Waste Connections is a high-quality waste hauler but, in our view, the stock price is baking in slightly overly optimistic midcycle revenue and margin assumptions,” he concludes.

Veeva Systems

VEEV

Fair Value: $97

Price: $149.21

Price/Fair Value: 1.54

Economic Moat: Wide

Uncertainty: Medium

A first-mover in providing customer relationship management services for pharmaceutical companies, Veeva Systems earns a wide economic moat. Its niche position, top-tier software, and operation-critical services will allow it to enjoy long-term economic profits, argues analyst Anna Baran. The firm’s two main businesses (Veeva Commercial Cloud and Veeva Vault) each have been adopted by most of the largest pharmaceutical and biotech companies. And the increased adoption of complementary Veeva products creates even stickier customers, she adds.

“We expect Veeva’s level of innovation, capacity to identify underserved industries, entrenched position, and ability to increase its total addressable market through new product launches to endure,” concludes Baran.

Nevertheless, the company’s shares trade at nosebleed levels--54% above our fair value estimate as of this writing.