I love to end the year thinking about shares that should do well next year. But they won’t all prosper and we should also consider those that might have a tough year ahead of them — whether we already hold them or are perhaps thinking of buying them.
Supermarket carnage
My first candidate for an overpriced share going into 2017 is Tesco (LSE: TSCO). If you didn’t see Tesco’s problems coming, you’re in good company, as neither did Warren Buffett — though I’d love to be wrong only as often as he’s been over my investing career.
Tesco has recognised its problems, has got in a new boss, and has worked hard on a strategy of adjusting to the new austerity-driven changes to the UK’s shopping environment. But many who hark back to the trustworthy old days just assume that Tesco will get itself back ahead of the pack in terms of earnings growth and dividends.
Yet how many have been thinking the same about Marks & Spencer over the past 20 years, while that old high street stalwart has consistently failed to regain its position in the hearts and minds (and wallets) of the great British public?
Tesco shares are on a P/E of 27 for the year to February, dropping to 21 for 2018, with no dividends to speak of. To me, that’s too expensive for a supermarket and I see a poor year ahead.
Fads and fashions
I’m going against a lot of growth investors when I say I think ASOS (LSE: ASC) is overvalued.
The online fashion retailer has achieved impressive market penetration, but forecast earnings per share for the year to August 2017 are still way below 2012’s figure, and the shares are on a forward P/E of 62. (Will you please stop slicing those onions, it’s making me cry — oh, you’re not.)
EPS is going to have to multiply fourfold to bring that figure back close to the FTSE’s long-term average P/E, and every year that slips by is another in which the competition can pile into what’s essentially a low-barrier business.
Sure, growth shares often command sky-high valuations, and ASOS shares keep booming — but they keep busting too. I know many will disagree, and I do concede that ASOS is in a growing market and has an early-mover advantage. But at today’s share prices, I see a disappointing 2017 coming.
Not joined up
I’ll tell you what I don’t see when I look at Vodafone Group (LSE: VOD). A joined-up international company with any obvious long-term global plan. What I see, instead, is a number of operations in different countries around the world that just happen to be owned by the same overall company.
And I see Vodafone just going with the flow, without any sort of overall grand strategy. Sure, maybe that’s the way a commodities firm should be, and it’s undeniable that telecommunication is becoming more and more of an indistinguishable commodity every year with no real differentiation between products and services.
But Vodafone isn’t on a commodity stock valuation. We’re looking at P/E multiples of about 30, while the firm pays out in dividends around twice its earnings. That looks like takeover pricing to me, and the longer we go without one the more I see the potential for a share price fall.