what is overvalued 
an overvalued stock has a current price that is not justified by its earnings outlook known as profit projections or its price earnings p e ratio consequently analysts and other economic experts expect the price to drop eventually overvaluation may result from an uptick in emotional trading or illogical gut driven decision making that artificially inflates the stock s market price overvaluation can also occur due to deterioration in a company s fundamentals and financial strength potential investors strive to avoid overpaying for stocks the most popular valuation metric for publicly traded companies is the p e ratio which analyzes a company s stock price relative to its earnings an overvalued company trades at an unjustifiably rich level compared to its peers understanding overvalued stocksa small group of market theorists believes that the market is perfectly efficient by nature they opine that fundamental analysis of a stock is a pointless exercise because the stock market is all knowing therefore stocks may neither be truly undervalued or overvalued contrarily fundamental analysts are staunch in their belief that there are always opportunities to ferret out undervalued and overvalued stocks because the market is as irrational as its participants overvalued stocks are ideal for investors looking to short a position this entails selling shares to capitalize on an anticipated price declines investors may also legitimately trade overvalued stocks at a premium due to the brand superior management or other factors that increase the value of one company s earnings over another 