how to find overvalued stocks
relative earnings analysis is the most common way to identify an overvalued stock this metric compares earnings to some comparable market value such as price the most popular comparison is the p e ratio which analyzes a company s stock price relative to its earnings analysts looking for stocks to short may seek overvalued companies with high p e ratios particularly when compared to other companies in the same sector or peer group for example assume a company has a stock price of 100 and earnings per share of 2 the calculation of its p e ratio is determined by dividing the price by the earnings 100 2 50 so in this example the security is trading at 50 times earnings if that same company has a banner year and makes 10 in eps the new p e ratio is 100 divided by 10 or 10 times 100 10 10 most people would consider the company to be overvalued at a p e of 50 but possibly undervalued at 10 real world examplealthough by definition a stock is overvalued only by the opinion of an analyst the motley fool website is never shy about weighing in for example they deemed the pharma giant ely lilly to be overvalued because the company s valuation reached untenable levels following the company s meteoric rise during the tail end of 2019 and early days of 2020 according to the motley fool in january 2020 the company s stock was the second most expensive among its industry peers and eli lilly might find it hard to deliver consistent expected growth 