Good morning everyone - hope all is well on this Friday morning.
For today's blog I'd like to discuss overpriced stocks. Many investors focus on underpriced, and rightfully so, however it is ideal to take a few bearish positions in overpriced stocks to hedge against a market downturn.
Overpriced stocks are heavily skewed towards the biotechnology industry. These companies have little tangible assets and earnings, yet are trading at significantly high values for the potential of discovering a revolutionary drug.
This type of trading is a form of gambling - both when taking bullish and bearish positions. We should not try to speculate on this industry.
So other than biotechnology stocks - what others are overpriced? Well, AAMC is the elephant in the room. It is trading at a 347 P/B ratio, and has not turned a profit yet so has no real P/E ratio. CHTR is trading at a 86 P/B ratio and a 41 forward P/E ratio, with extreme debt (0.2 Current Ratio).
Be careful when entering a bearish position. Don't use 25% of your portfolio to short a single stock; the market can be irrational longer than your portfolio can be solvent. You never know how long an overpriced stock will trend upwards, therefore it is wise to diversify your bearish positions across multiple overpriced stocks.