RUN: 3 Overvalued Stocks to AVOID in December

The stock market is trading at all-time highs as investors remain optimistic about the economic recovery, despite the country’s COVID-19 situation taking a turn for the worse. The broad-market benchmark, the S&P 500, finished November 11.8% higher compared to the prior month. Moreover, the index notched its 28th record close of 2020 last week. The market’s rally over the past six months has led to several stocks becoming overvalued.

Investors usually use price-to-earnings (P/E) and price-to-sales (P/S) ratios for understanding whether a stock is overvalued or undervalued. If a stock is trading at premium in terms of these ratios relative to its peers or sector, it is considered overvalued and could be due for a pullback.

Though momentum stocks usually trade at premium valuations, it is becoming increasingly uncertain whether there is any further upside left in some of the fast-moving stocks. Sunrun Inc. (RUN), Planet Fitness, Inc. (PLNT) and Freshpet, Inc. (FRPT) have gained significant so far this year, and it appears from their current valuation multiples that a pullback is due for them. So, it’s better to avoid these stocks for now.

Sunrun Inc. (RUN)

RUN engages in the design, development, installation, and maintenance of residential solar energy systems in the United States. It also sells panels and racking, solar leads, as well as offers battery storage. It is the largest pure-play solar company after its recent acquisition of Vivint Solar in October. Moreover, RUN was added to the S&P Midcap 400 index in the Industrials sector in August this year.

In terms of forward P/E, RUN is currently trading at 460.10x, 1,935.4% more expensive than the sector average of 22.60x. Moreover, RUN is overvalued in terms of trailing-12-month P/S as well (8.25x versus 1.37x).

In the third quarter of 2020, RUN reported total revenue of $210 million, declining 3% year-over-year. Despite increasing its megawatts (MW) deployment 40% sequentially to 109 MW, solar energy systems and product sales revenue came in at $95.3 million, a decrease of $24 million, or 20%, compared to the year-ago quarter. However, RUN delivered an EPS of $0.28, rising 21.7% year-over-year.

RUN is presently emphasizing on leasing its solar equipment. The company offers its product at zero dollars upfront. This may boost its customer base initially, but the financing operation might lead to a balance sheet sinkhole in the long-run. Though analysts expect RUN’s current quarter EPS to rise 10% year-over-year, the company’s current year EPS is expected to fall 42.9%.

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With a year-to-date gain of 318%, RUN closed Friday’s trading session at $57.71. However, the stock has started to lose its momentum and is down 11.3% so far this month. RUN is presently trading 30% below its all-time high of $82.42.

Planet Fitness, Inc. (PLNT)

PLNT is one of the largest and fastest-growing franchisors and operators of fitness. As of September 30, 2020, the company had more than 14.1 million members and 2,086 stores centers in the United States. PLNT primarily operates through three segments – Franchise, Corporate-Owned Stores, and Equipment.

PLNT’s forward P/E ratio currently stands at 905.61, which is significantly higher than the sector average of 19.50. In terms of trailing-12-month P/S as well, the stock is currently trading at 14.16x, 1,057.7% more expensive than sector average of 1.22x.

Total revenue in the last reported third quarter declined 36.8% year-over-year to $105.4 million. System wide same store sales also decreased 5.6%. Moreover, the company reported a loss of $0.04 per share, compared to $33.1 million, or $0.36 per diluted share in the prior year period.

With mandated social distancing due to the pandemic, gym chains have struggled immensely. The stock did surge after the coronavirus vaccine news last month, nearly touching it’s all-time high. However, until that vaccine is widely available, it is still too early for the company to improve its bottom line. Consequently, analysts expect PLNT’s current quarter and current year EPS to decline 50% and 95%, respectively.

PLNT closed Friday’s trading session at $75.12, gaining 20.4% in the past three months. However, the stock is up merely 0.6% so far this year and is presently trading 15.4% below its 52-week high of $88.77.

Freshpet, Inc. (FRPT)

FRPT manufactures and markets natural fresh foods, refrigerated meals, and treats for dogs and cats in the United States, Canada and Europe. The company sells its products under the Freshpet brand, and Dognation and Dog Joy labels through retail as well as online channels.

FRPT’s forward P/E ratio currently stands at 458.94, 1,991% more expensive than the sector which has an average P/E ratio of 21.95. The company’s trailing-12-month P/S is 17.37x, while the sector average is at 1.53x.

In the third quarter of 2020, FRPT’s net sales increased 29% year-over-year to $84.2 million. Gross margin came in at 43.5%. The company delivered EPS of $0.09, relatively stable compared to the year-ago value of $0.08.

The demand for pet food surged dramatically as the pandemic witnessed a rise in animal adoptions and fostering. Analysts expect FRPT’s current quarter EPS to rise 8.3%. However, the company has reported a negative earnings surprise in three of the trailing four quarters.

With a year-to-date gain of 128.4%, FRPT closed Friday’s trading session at $134.98. The stock has lost just 0.2% in the past month, but is presently trading 3.34% below its 52-week high of $139.71.

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RUN shares were trading at $59.20 per share on Monday morning, up $1.49 (+2.58%). Year-to-date, RUN has gained 328.67%, versus a 16.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...